[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]



 
                      OVERSIGHT OF PENSION ISSUES

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 10, 1998

                               __________

                             Serial 105-69

                               __________

         Printed for the use of the Committee on Ways and Means


                                


                      U.S. GOVERNMENT PRINTING OFFICE
 55-945 CC                   WASHINGTON : 1999
------------------------------------------------------------------------------
                   For sale by the U.S. Government Printing Office
 Superintendent of Documents, Congressional Sales Office, Washington, DC 20402



                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky                WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri

                     A.L. Singleton, Chief of Staff
                  Janice Mays, Minority Chief Counsel

                                 ______

                       Subcommittee on Oversight

                NANCY L. JOHNSON, Connecticut, Chairman

ROB PORTMAN, Ohio                    WILLIAM J. COYNE, Pennsylvania
JIM RAMSTAD, Minnesota               GERALD D. KLECZKA, Wisconsin
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
PHILIP S. ENGLISH, Pennsylvania      JOHN S. TANNER, Tennessee
WES WATKINS, Oklahoma                KAREN L. THURMAN, Florida
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri


Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.



                            C O N T E N T S

                               __________

                                                                   Page

Advisories announcing the hearing................................     2

                               WITNESSES

U.S. General Accounting Office, William J. Scanlon, Director, 
  Health Financing and Systems Issues, Health, Education, and 
  Human Services Division........................................    89
Pension Benefit Guaranty Corporation, David M. Strauss, Executive 
  Director.......................................................    22

                                 ______

American Council of Life Insurance, Ron E. Merolli...............    42
American Society of Pension Actuaries, Michael Callahan..........    66
Business and Professional Women/USA, Gail Shaffer................    61
Greg Fradette Agency, Inc., Greg Fradette, Sr....................    75
Institute of Electrical and Electronics Engineers, Inc.-United 
  States of America, James V. Leonard............................    54
National Life Insurance Co., Ron E. Merolli......................    42
Pension Rights Center, Gregory Moore.............................    47
PenTec, Inc., Michael Callahan...................................    66

                       SUBMISSIONS FOR THE RECORD

Blunt, Hon. Roy, a Representative in Congress from the State of 
  Missouri, statement............................................   102
Neal, Hon. Richard E., a Representative in Congress from the 
  State of Massachusetts, statement..............................    28
Yakoboski, Paul J., Employee Benefit Research Institute, 
  statement......................................................   105



                      OVERSIGHT OF PENSION ISSUES

                              ----------                              


                        TUESDAY, MARCH 10, 1998

                  House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 3:03 p.m., in 
room 1100, Longworth House Office Building, Hon. Nancy L. 
Johnson (Chairwoman of the Subcommittee) presiding.
    [The advisories announcing the hearing follow:]

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                       SUBCOMMITTEE ON OVERSIGHT

FOR IMMEDIATE RELEASE                             CONTACT: (202) 225-7601
March 3, 1998
No. OV-13

                      Johnson Announces Hearing on
                      Oversight of Pension Issues

    Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on 
Oversight of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on oversight of various pension 
issues. The hearing will take place on Tuesday, March 10, 1998, in the 
main Committee hearing room, 1100 Longworth House Office Building, 
beginning at 2:00 p.m. In view of the limited time available to hear 
witnesses, oral testimony at this hearing will be from invited 
witnesses only. Witnesses will include officials from the Pension 
Benefit Guaranty Corporation (PBGC), experts in the area of pension 
plan coverage, employers and other business representatives, and 
association representatives. However, any individual or organization 
not scheduled for an oral appearance may submit a written statement for 
consideration by the Committee and for inclusion in the printed record 
of the hearing.
      

BACKGROUND:

      
    PBGC insures the retirement incomes of more than 42 million 
American workers--one of every three workers--in about 50,000 defined 
benefit pension plans. A defined benefit plan provides a specified 
benefit at retirement, often based on a combination of salary and years 
of service. PBGC is financed through premiums collected from plan 
sponsors, returns on investments, and recoveries from employers 
responsible for underfunded terminated plans. PBGC currently pays 
monthly retirement benefits to about 200,000 retirees in over 2,348 
terminated plans. The Ways and Means Committee considers legislation 
concerning PBGC premiums and also exercises jurisdiction over the tax 
treatment of pension plans.
      
    Half of all American workers, over 50 million people, are without 
pension coverage. According to the U.S. General Accounting Office, 87 
percent of workers employed by small businesses with fewer than 20 
employees have no retirement coverage, and 62 percent of workers in 
small businesses with between 20 and 200 employees have no retirement 
plan coverage, while 72 percent of workers in firms with over 500 
employees have some form of retirement plan coverage.
      
    Coverage is most limited in the sector of the economy that provides 
most of the new jobs in today's workforce: small business. According to 
the Small Business Administration, 75 percent of the 2.5 million new 
jobs created in 1995 were created by small businesses. While many small 
businesses sponsor defined contribution plans, according to the U.S. 
Department of Labor, between 1987 and 1993, the number of small 
businesses with defined benefit plans dropped from 108,221 to 41,780--a 
60 percent decline in seven years.
      
    In announcing the hearing, Chairman Johnson stated: ``It is 
alarming that half of all American workers are without pension coverage 
today, and that only 20 percent of workers in small businesses have 
pension coverage. We know how difficult it is for seniors to live on 
Social Security benefits alone. As the baby boomers approach their 
retirement years, the need to broaden pension coverage is greater than 
ever. We need to determine whether the complexity of pension law is 
coming between workers and the coverage they need.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on the current availability of pension plans 
to American workers, incentives for, and obstacles to, expanded pension 
coverage, the financial status and administration of Federally-insured 
pension plans monitored by PBGC, and related issues involving retiree 
health benefits.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit at least six (6) 
single-space legal-size copies of their statement, along with an IBM 
compatible 3.5-inch diskette in ASCII DOS Text or WordPerfect 5.1 
format only, with their name, address, and hearing date noted on a 
label, by the close of business, Tuesday, March 24, 1998, to A.L. 
Singleton, Chief of Staff, Committee on Ways and Means, U.S. House of 
Representatives, 1102 Longworth House Office Building, Washington, D.C. 
20515. If those filing written statements wish to have their statements 
distributed to the press and interested public at the hearing, they may 
deliver 200 additional copies for this purpose to the Subcommittee on 
Oversight office, room 1136 Longworth House Office Building, at least 
one hour before the hearing begins.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be typed in single space on legal-size paper and may not exceed a total 
of 10 pages including attachments. At the same time written statements 
are submitted to the Committee, witnesses are now requested to submit 
their statements on an IBM compatible 3.5-inch diskette in ASCII DOS 
Text or WordPerfect 5.1 format. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, full address, a telephone number where the witness or the 
designated representative may be reached and a topical outline or 
summary of the comments and recommendations in the full statement. This 
supplemental sheet will not be included in the printed record. The 
above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press 
and the public during the course of a public hearing may be submitted 
in other forms.
      

    Note: All Committee advisories and news releases are available on 
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.
      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                

ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS

                       SUBCOMMITTEE ON OVERSIGHT

FOR IMMEDIATE RELEASE                         CONTACT: (202) 225-7601
March 9, 1998
No. OV-13-Revised

                Time Change for Subcommittee Hearing on
                        Tuesday, March 10, 1998,
                     on Oversight of Pension Issues

    Congresswoman Nancy L. Johnson (R-CT), Chairman of the Subcommittee 
on Oversight, Committee on Ways and Means, today announced that the 
Subcommittee hearing on oversight of pension issues, scheduled for 
Tuesday, March 10, 1998, at 2:00 p.m., in the main Committee hearing 
room, 1100 Longworth House Office Building, will begin instead at 3:00 
p.m.
      
    All other details for the hearing remain the same. (See 
Subcommittee press release No. OV-13, dated March 3, 1998.)
      

                                


    Mr. Portman [presiding]. The Subommittee will be in order.
    Mrs. Johnson is taking care of some business, and she'll be 
joining us shortly.
    Today, we are here to examine the issues surrounding our 
current pension system and the obstacles to coverage for a 
great number of workers. Because health care demands a 
significant portion of the incomes of many seniors, retired 
health care is also an important retirement income security 
issue, we also will be delving into that somewhat today.
    All of us want to ensure that individuals are adequately 
prepared for retirement. Yet the complexity of Federal laws and 
regulations sometimes make that more, not less, difficult. This 
is especially troublesome, as many of you know in the small 
business sector, where currently 87 percent of workers employed 
by companies with 20 or fewer employees have no pension 
coverage whatsoever.
    The SIMPLE, Savings Incentive Match Plan for Employees, 
defined contribution plan for small businesses that Senator 
Dole and I authored a couple of years ago, has been quite 
successful. But we need to do a lot more, and I am very pleased 
that Chairwoman Johnson and this Subcommittee are taking a 
careful look at this. Chairwoman Johnson has placed particular 
emphasis on that issue, and I congratulate her on the 
leadership she has shown in introducing a defined benefit plan 
for small business, SIMPLE being the defined contribution plan; 
Mrs. Johnson's being a defined benefit plan called the SAFE, 
Secure Assets for Employees Plan Act of 1997, plan.
    They say imitation is the sincerest form of flattery, so 
Mrs. Johnson should feel especially proud and flattered that 
the administration has also sent forward its small business 
defined benefit plan, the SMART, Secure Money Annuity or 
Retirement Trusts, plan. So we have SIMPLE, SAFE, and SMART. We 
will hear more about those later today.
    We're especially focused on small business today, as I 
said, but we also must continue our efforts to simplify the 
pension area for all businesses. My colleague Ben Cardin, with 
whom I worked to get pension simplifications in both the 1996 
and 1997 tax packages, and I are working on additional 
provisions. The current patchwork of laws and regulations, we 
think works against a coherent national retirement income 
policy, and we are putting together a second simplification 
package which we hope to introduce within the next month.
    I want to urge this Subcommittee and the Full Committee to 
continue to look at retirement issues in a broad-based way so 
that employers are not burdened by the complex regulations that 
so often negate the positive intentions of the laws we pass in 
this area.
    I very much look forward to today's witnesses. And, again, 
Mrs. Johnson will be joining us at about 4 p.m. I would now 
like to yield to Mr. Coyne for a statement.
    Mr. Coyne. Thank you, Mr. Chairman.
    As you know today's hearing will focus on one of the most 
important issues facing American workers and their families: 
Pension coverage. Retirement income is an issue of concern to 
all Americans, whether they are currently retired, planning for 
retirement, or worrying about the economic stability of their 
retired parents and grandparents.
    The PBGC, Pension Benefit Guaranty Corporation, ensures the 
retirement incomes of more than 42 million workers. The PBGC 
now shows a surplus for the first time in 22 years of its 
history. At the same time, about two thirds of our single 
employer plans are fully funded, with assets of over $1 
trillion. This is great news for all workers who are currently 
covered by private pensions. It means that they can count on 
their pensions being there when they are ready to retire. But 
at the same time, more than half of all American workers, about 
50 million people, do not have any retirement coverage at all. 
When they retire, they will have to depend on Social Security 
payments, their personal savings, and the generosity of friends 
and families.
    It is within the Subcommittee's oversight responsibilities 
to ask why this is and what can we do to expand coverage. In 
Pittsburgh, the city that I represent, 43 percent of my retired 
constituents do not have private pensions. A Social Security 
check, which averages less than $750 a month in Pennsylvania, 
is all most of them have to pay their bills.
    One of their greatest fears is that they will need 
expensive health care or prescription drugs, because many 
employers are dropping retiree health coverage, leaving their 
former workers completely dependent on Medicare and their 
personal savings.
    The stories in my district are similar to those of 
Americans across the country who do not have pensions. Most of 
them work for small businesses. Many of them work for wages 
that are so low that they cannot contribute to a retirement 
plan, which often results in them not having retirement plans 
at all. Some of them never worked for any one employer long 
enough to be vested in the retirement plan. Many of them are 
widows living alone. Three-fourths of the elderly poor are 
women, and one of the primary reasons is lack of private 
pension coverage. Women tend to move in and out of the labor 
market, work at home, and earn less for what they do. All of 
these factors make them likely to have very small pensions or 
none at all.
    I wanted to point out that the Teresa and John Heinz 
Foundation in Pennsylvania has just published a retirement 
guide for women. This commonsense guide to retirement issues is 
excellent. I will provide a copy for inclusion in the record 
with the approval of the Chairman.
    Mr. Portman. Without objection.
    Mr. Coyne. The problem of men and women without pensions is 
not new, and Members of Congress have been concerned about it 
for many years. My colleague, Chairwoman Johnson, has been 
particularly active in trying to solve this problem over the 
years. Despite our best efforts, many small business employees, 
low-income workers, and women still do not have pensions. We 
need to focus on helping these groups, which are the majority 
of the pensionless and of the elderly poor.
    Today's hearing will give us an opportunity to discuss and 
analyze the administration's fiscal year 1999 proposal for 
expanding pension coverage by small businesses. We also have an 
opportunity to consider Congressman Kleczka's bill, H.R. 211. 
It addresses another critical issue in retirement security: The 
declining levels of retirement health benefit coverage. We will 
also hear from a number of other individuals who have spent 
many years studying this issue. I think they will give us a 
deeper understanding of the problems retirees and their 
employers face, but I hope that they will also suggest 
solutions.
    We need to find a way to help those who need it the most: 
Small business employees, women, and the working poor.
    Thank you, Mr. Chairman.
    Mr. Portman. Thank you. And without objection, the guide 
from the Heinz Foundation will be entered into the record.
    [The information follows:]

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    Mr. Portman. Our first witness is David M. Strauss, 
Executive Director of the Pension Benefit Guaranty Corporation 
I think you're going to give us a little background on PBGC, 
and then I hope some commentary on the SAFE plan, the SMART 
plan, and other defined benefit plan proposals that are out 
there.
    Mr. Strauss.

  STATEMENT OF DAVID M. STRAUSS, EXECUTIVE DIRECTOR, PENSION 
                  BENEFIT GUARANTY CORPORATION

    Mr. Strauss. Thank you, Mr. Chairman, Members of the 
Subcommittee.
    I appreciate the opportunity to appear before you today to 
speak about the importance of defined benefit pension plans for 
America's workers. I want to thank the Subcommittee Chairwoman, 
Mrs. Johnson, for holding this hearing for the interest that 
she and the other Members of the Subcommittee have in the 
retirement security of America's workers, including workers in 
the Nation's most dynamic economic sector, small business.
    As the Executive Director of the PBGC, I have set three 
priorities for the Corporation. Today, I want to concentrate on 
one of those priorities: Promoting defined benefit pension 
coverage. But first, let me briefly address the other two--
safeguarding PBGC's solvency and making PBGC a premier customer 
service agency.
    Regarding my first priority, PBGC's solvency, the 
corporation had its first surplus in 1996, and we fully expect 
to report good news again this year, when we release our annual 
report later this month. The single employer program, which as 
late as 1993 was running a deficit of nearly $3 billion, has 
now achieved a surplus that can serve as a cushion for future 
economic downturns. Mr. Chairman, your Subcommittee's efforts 
in enacting the Retirement Protection Act of 1994 have been an 
important factor in the single employer's program current sound 
financial condition. The multiemployer program also continues 
to be in good shape, with a surplus since 1982.
    My second priority is to make the PBGC a premier customer 
service organization, not only for the workers and the retirees 
we protect, but also for the employers that pay our premiums 
and for the pension professionals who advise them. In my 
written testimony, I have provided you with a number of 
examples of steps we have taken to improve our customer 
service.
    Now, let me turn to my third priority, which is the theme 
for this afternoon's hearing, ``Promoting defined benefit 
pension coverage for American workers.'' Mr. Chairman, I have a 
very personal knowledge of just how valuable a defined benefit 
pension can be, especially for an older worker.
    My father, who turned 88 last month, is that older worker. 
He's lived all of his life in North Dakota, and was a meat 
cutter in a grocery store when he retired at age 63 without a 
pension. He then took a part-time job for $1.75 a hour as a 
janitor at the local high school. For the first time in his 
life, he was covered by a defined benefit pension plan. He was 
making $6.25 an hour when he retired a second time, 15 years 
later.
    The pension my father earned during those 15 years now 
provides him with $169 a month, a supplement of over 20 percent 
to his Social Security benefit. As the Subcommittee Chairwoman, 
Mrs. Johnson, has pointed out, we know how difficult it is for 
seniors to live on Social Security alone. So this pension of 
$169 a month makes a real difference. In addition, if my father 
dies before my mother, the pension plan will provide her with 
the survivor benefit for the remainder of her life. So I know 
from my father's experience how important a predictable, secure 
benefit for life can be, even one that may seem to many people 
a relatively small amount of money. I also know from my 
father's experience that a worker is never too old for a 
defined benefit plan and that a defined benefit plan can make a 
great deal of difference even for workers making very modest 
salaries.
    Mr. Chairman, today too many American workers, including 
the huge cohort of baby boomers edging ever closer to 
retirement, have either no retirement savings or inadequate 
savings. And some have very few years left in which to save.
    Defined benefit plans can offer a solution to this problem, 
but the number of defined benefit plans offered by small- and 
medium-sized employers has decreased substantially. As Mrs. 
Johnson, the Subcommittee Chairwoman, has pointed out when she 
joined with Congressmen Fawell and Pomeroy to introduce SAFE, 
the low level of pension coverage for workers in small business 
is particularly troubling, given that small business provides 
most of the new jobs in today's work force.
    Millions of small business employees have no employment-
based way to provide for their retirement. As opposed to over 
60 percent of workers in large firms, only 20 percent of 
workers in firms with fewer than 100 employees have pension 
coverage. To help bridge this gap, we agree with Mrs. Johnson 
that small business needs a defined benefit retirement plan 
that is easy to administer.
    Defined benefit plans have many advantages for workers and 
their spouses. They provide predictable, secure benefits for 
life.
    Sometimes we forget that defined benefit plans can also 
help employers. For example, they promote company loyalty and 
help retain valuable workers. Today, many small business owners 
are baby boomers, not far from retirement age. Often, their 
businesses have only recently matured enough to be able to 
support a pension plan. If the owner and his or her workers 
have not been covered by an adequate retirement plan, it may 
now be too late to build meaningful retirement savings through 
a defined contribution plan. In the limited window that remains 
before retirement, a defined benefit plan allows a small 
business to provide meaningful retirement benefits for its 
middle-aged workers, and for older workers like my father, 
something difficult with only a SIMPLE or a 401(k) plan.
    An important step in expanding the number of defined 
benefit plans is to enact legislation creating a simplified 
defined benefit plan for small business. Mrs. Johnson's 
proposal, the SAFE plan, and the President's proposal, the 
SMART plan, are similar. They both combine some of the best 
features of defined benefits and defined contribution plans and 
remove major obstacles that have prevented small business from 
offering defined benefit plans.
    Under both plans, funding would be more predictable. 
Administrative costs and complexity would be reduced. Reporting 
would be simpler and benefits would be more understandable and 
portable. Both proposals would also give older workers, like my 
father, a chance to earn a meaningful benefit. At the same 
time, both would provide the opportunity for workers to benefit 
from investment returns, an especially attractive feature for 
younger workers.
    Mr. Chairman, I would like to mention three aspects of the 
President's SMART proposal that I think are especially 
important.
    First, SMART would provide for a true defined benefit plan 
with a predictable lifetime annuity for the participant and 
spouse.
    Second, SMART would provide for a fair distribution of 
benefits between owners and their workers.
    And third, SMART would provide workers in small businesses 
with a PBGC guarantee, the same protection we provide to other 
workers in defined benefit plans.
    Although the funding requirements of the SAFE and SMART 
substantially reduce the risk to the worker, there are still 
circumstances that could result in a loss. We believe, 
therefore, that these plans should be insured by the PBGC. 
America's workers have come to expect a PBGC guarantee and to 
rely on the PBGC when their plans fail. The PBGC cannot 
guarantee these plans without an insurance premium; however, 
because these plans, by their design, may pose less risk, PBGC 
proposes that they pay a substantially reduced premium.
    Mr. Chairman, the administration looks forward to working 
with Congress on a bipartisan basis, as we did in enacting the 
Retirement Protection Act in 1994 and SIMPLE in 1996. We need 
to give small business a workable defined benefit plan before 
this Congress adjourns.
    I thank you again for allowing me the opportunity to 
testify before you this afternoon, and I will be happy to 
answer any questions you may have.
    [The prepared statement follows:]

Statement of David M. Strauss, Executive Director, Pension Benefit 
Guaranty Corporation

    Madam Chairman and Members of the Subcommittee:
    Good afternoon. I am David Strauss, the PBGC's Executive 
Director. The Pension Benefit Guaranty Corporation (PBGC), 
established as a federal corporation by the Employee Retirement 
Income Security Act of 1974 (ERISA), protects the pensions of 
about 42 million workers and retirees in about 45,000 private 
defined benefit pension plans. PBGC's Board of Directors is 
chaired by the Secretary of Labor. The Secretaries of the 
Treasury and Commerce are also Board members. PBGC operates two 
insurance programs, the larger single-employer program and the 
multiemployer program. PBGC paid $824 million in benefits to 
over 200,000 people during FY 1997. Another 260,000 people will 
receive benefits when they retire in the future. PBGC receives 
no funds from general revenues. Operations are financed by 
three sources: (1) insurance premiums set by Congress and paid 
by plan sponsors; (2) investment income and assets from plans 
trusteed by PBGC; and (3) recoveries from companies that 
formerly sponsored plans.
    I appreciate the opportunity to appear before you today to 
speak about the importance of defined benefit pension plans for 
America's workers.
    I want to thank you, Madam Chairman, for holding this 
hearing and for the interest you and the other members of this 
Subcommittee have in the retirement security of America's 
workers, including workers in the Nation's most dynamic 
economic sector--small business.
    As Executive Director of PBGC, I am acutely aware of how 
essential PBGC insurance is to safeguarding the pension 
benefits of American workers. The impact of what PBGC does 
takes on even a greater importance when you put faces to the 
numbers, as I have recently had an opportunity to do. I have 
met with hundreds of men and women in newly trusteed plans who 
worked for now-failed companies they thought would provide 
secure employment and benefits for the rest of their lives. You 
can imagine their relief when I was able to tell them that 
their benefits were safe.
    Since coming to PBGC, I have also had the opportunity to 
fully appreciate the work of the Congress in enacting the 
Retirement Protection Act (RPA) of 1994. Your efforts in 
enacting these reforms have been an important factor in PBGC's 
shift from being a federal agency with serious problems to an 
agency in sound financial condition.
    This turnaround in PBGC's fortunes has now provided me with 
the opportunity to address more general policy matters such as 
those before the subcommittee this afternoon--how to increase 
the availability of defined benefit pension plans in the 
crucial small business sector of our economy.
    I set three priorities for myself as PBGC's Executive 
Director:
     Safeguarding PBGC's solvency;
     Making PBGC a premier customer service agency; and
     Promoting defined benefit plans.
    Today, I want to concentrate on promoting defined benefit 
plans--but let me just briefly address my other two concerns.

                      Safeguarding PBGC's Solvency

    Last year PBGC had its first surplus in history, and we 
fully expect to report good news again this year, thanks to a 
healthy economy and good asset returns. The single-employer 
program, which as late as 1993 was running a deficit of nearly 
$3 billion, has now achieved a surplus that can serve as a 
cushion for future economic downturns.
    The multiemployer program also continues to be in sound 
financial condition, with a surplus since 1982.
    But PBGC has to be ever vigilant because there are many 
factors that affect our financial health that are beyond our 
control:
     We are always taking on new plans and assuming new 
unfunded benefit liabilities even when the economy is strong. 
In the last year alone we have trusteed pension plans with more 
than 50,000 participants.
     Changing economic conditions (such as a dip in the 
stock or bond markets) could reduce the value of the assets we 
manage.
     Decreases in long-term interest rates have the 
effect of increasing the present value of the benefits PBGC 
will pay for decades to participants of trusteed plans.
     And, of course, we have to be ready for economic 
downturns.

             Making PBGC a Premier Customer Service Agency

    My second priority is making PBGC a premier service 
organization.

For workers and retirees:

     We operate a Customer Service Center with a toll-
free telephone number, and respond to about 100,000 inquiries a 
year.
     PBGC Customer Service standards require that phone 
calls be answered within 24 hours, letters within a week, and 
status reports be given if the response will take longer.
     We use the Internet to locate missing participants 
so they can claim pensions that are owed them. Since the 
program began in 1996, we have located nearly 1200 people owed 
over $5 million dollars.
     We have improved communications with retirees and 
deferred vested participants.
     We hold meetings with participants of newly-
trusteed plans to explain PBGC's guarantees and the processing 
of their plans.

For premium payers and their advisors:

     We revised our premium compliance program to 
reduce the administrative burden on those we audit, and we 
reduced late payment penalties for plans that correct 
underpayments before PBGC issues a written notice.
     We exempted small plans from reporting to PBGC on 
quarterly pension contributions.
     I established a ``virtual town hall'' through the 
Internet to communicate with premium payers and pension 
professionals.

                    Promoting defined benefit plans

    My third priority is, working with the Departments of 
Treasury and Labor and others in the Administration, promoting 
defined benefit pension coverage for American workers.
    Today too many American workers, including the huge cohort 
of baby boomers who are edging ever closer to retirement, have 
either no retirement savings or inadequate savings. Some have 
very few years left in which to save. The statistics are 
worrisome:
     About 50 million Americans--or nearly 50 percent 
of the private sector workforce--are not covered by an 
employer-provided retirement plan.
     Only 20 percent of small business workers are 
covered by a retirement plan.
     Many workers are not saving enough at a young 
enough age to fund their retirements adequately.
     Low wage workers often have the most difficult 
time setting aside savings. Many workers have difficulty 
grappling with investment decisions.
    Defined benefit plans offer a solution for many of these 
problems. But defined benefit plans in small and medium-sized 
employers have decreased substantially.
    Millions of small business employees have no employment-
based way to provide for their retirement. Only 20 percent of 
workers in firms with fewer than 100 employees have pension 
coverage, as opposed to 62 percent of workers in firms with 100 
or more employees.
    As you, Madam Chairman, pointed out last May when you, 
along with Congressmen Fawell and Pomeroy, introduced SAFE 
(H.R. 1656, the Secure Assets for Employees Plan Act of 1997), 
the low level of pension coverage for workers in small business 
``is particularly troubling given that small business provides 
most of the new jobs in today's workforce...Small business 
needs a defined benefit retirement plan that is easy to 
administer...''
    In 1996, the Administration and Congress worked on a bi-
partisan basis to create the SIMPLE, a 401(k)-type of plan for 
small business. I hope we can work together again to give those 
same small businesses an additional option--a defined benefit 
plan tailored to their needs.

                Defined Benefit Plan Advantages--Workers

    Defined benefit plans have many advantages for workers and 
for employers. For workers, they provide a predictable, 
guaranteed, lifetime pension for the worker and often for the 
worker's spouse.

By predictable I mean:

     Benefits at retirement are predictable.
     Benefits are not subject to the ups and downs of 
the stock and bond markets.
     Benefits at retirement are not dependent on the 
amount a worker contributes to the plan.

By secure I mean:

     PBGC guarantees to pay most--often all--of the 
benefit if the plan cannot afford to pay for the benefits when 
the employer goes out of business.
     Older workers approaching retirement can earn a 
meaningful retirement benefit.

By lifetime I mean:
     The retiree is entitled to a monthly benefit for 
life no matter how long he or she lives.
     The retiree's surviving spouse is also entitled to 
a monthly benefit for life unless both have elected otherwise.

               Defined Benefit Plan Advantages--Employers

    Sometimes we forget the worth of defined benefit plans for 
employers:
     They promote company loyalty and help retain 
valuable workers;
     While the employer bears the investment risks for 
the plan, favorable investment returns and economic conditions, 
such as we are experiencing now, reduce employer costs and make 
it possible to increase worker benefits at nominal cost; and
     An employer can provide meaningful retirement 
benefits for workers, even older workers for whom the employer 
did not previously offer a retirement plan.

                  Small Employer Defined Benefit Plan

    Many small business owners are baby boomers not far from 
retirement age. Often their businesses have only recently 
matured enough to be able to support a pension plan. If the 
owner and his or her workers have not been covered by an 
adequate retirement plan, it may now be too late to build 
meaningful retirement savings through a defined contribution 
plan. A defined benefit plan can allow a small business to 
provide meaningful retirement benefits for its older workers, 
something difficult to do with only a SIMPLE or 401(k) plan.
    An important first step in expanding the number of defined 
benefit plans is to enact legislation creating a simplified 
defined benefit plan for small businesses as you, Madam 
Chairman, the President, and other Members of Congress have 
proposed. These proposals combine some of the best features of 
both defined benefit and defined contribution plans. The 
proposals remove some of the major obstacles to small business 
defined benefit plans.
     Funding contributions would be more predictable--
the employer would contribute an amount each year expected to 
fund the retirement benefit earned that year.
     Administrative costs would be lowered by reducing 
complexity and permitting simpler reporting.
     Benefits would be more understandable to the 
workers.
    Your SAFE and the President's SMART are similar in many 
respects, and their goals are the same--to create a simple 
small employer defined benefit plan. Both SAFE and SMART:
     Give older workers the chance to earn a meaningful 
benefit even if they were not previously covered by a plan.
     Provide benefits to low-wage workers who would 
have difficulty making contributions.
     Cover all workers with two years of service and 
$5,000 or more in compensation.
     Provide that employee benefits are 100% vested at 
all times.
     Can provide all workers the opportunity to earn 
greater benefits if investment returns exceed expectations, an 
especially attractive feature for younger workers.
     Are portable.
    As Executive Director of the PBGC, I would like to mention 
three aspects of the President's proposal that are especially 
important. First, SMART would provide for a fairer distribution 
of benefits between owners and moderate and lower-income 
workers. For example, SMART would limit the maximum 
compensation that may be taken into account in determining an 
individual's benefit for a year to $100,000 (indexed for 
inflation). Second, SMART would be a true defined benefit plan. 
It would provide a lifetime annuity for the participant and 
spouse. Third, SMART would provide workers with the same 
protections as other workers in defined benefit plans--a PBGC 
guarantee.
    The funding requirements of the SAFE and SMART 
substantially reduce the risk of loss to the worker; however, 
there are still a number of circumstances that could result in 
a loss, such as an employer not making the required 
contribution. These plans should be insured by the PBGC. Since 
ERISA's enactment in 1974, America's workers have come to 
expect a PBGC guarantee and to rely on the PBGC when their 
plans fail.
    PBGC cannot guarantee these plans without an insurance 
premium. However, because these plans, by their design, may 
pose less risk, PBGC proposes that they pay a substantially 
reduced premium.
    We look forward to working with you on a bi-partisan basis 
as we did in enacting RPA in 1994 and the SIMPLE in 1996. Let's 
give small business a simpler defined benefit plan before this 
Congress adjourns.
    I thank you again for allowing me the opportunity to 
testify before you this afternoon. I will be happy to answer 
any questions you may have.
      

                                


    Mr. Portman. Mr. Coyne.
    Mr. Coyne. Mr. Chairman, Richard Neal, a Member of the 
Subcommittee, asks that his statement be included in the 
record.
    Mr. Portman. Without objection.
    Mr. Coyne. Thank you.
    Mr. Portman. Without objection, the opening statement is 
included in the record. Are there any other opening statements 
people would like to submit for the record?
    [The opening statements follow:]

Opening Statement of Hon. Richard E. Neal, a Representative in Congress 
from the State of Massachusetts

    First of all, I would like to thank Chairwoman Johnson and 
Representative Coyne for holding this very timely hearing. I 
think pensions are an extremely important issue and an issue 
Congress should be able to address this year.
    I believe in the concept that retirement is based on a 
three-legged stool which consists of personal savings, Social 
Security and pensions. Forty percent of retirement income comes 
from Social Security. Nineteen percent comes from pensions and 
the rest comes from savings. Last session of Congress, we 
addressed personal savings by expanding individual retirement 
accounts (IRAs). Congressman Thomas and I worked toward this 
expansion which was included in the Taxpayer Relief Act of 
1997.
    Lately, Social Security has received much attention and I 
think this is an issue we need to address. I fully endorse the 
approach that President Clinton is taking. It is a very simple 
concept--to put Social Security first. Recently, Congressman 
Rangel introduced legislation which would reserve any budgetary 
surplus for Social Security. On March 4, the Congressional 
Budget Office announced that by the end of this year, we will 
have a budget surplus of $8 billion. This surplus should be 
used to reduce the debt.
    In the near future, we need to address Social Security, but 
in the immediate future Congress should take action to improve 
our current pension system. We should make it easier for 
employers to offer pensions. Pensions should provide for more 
than 19 percent of savings. We need to make individuals more 
responsible for their retirement.
    Our society has changed and no where are these changes more 
evident than in the workplace. It is now more common for 
individuals to change jobs than to stay with one firm for an 
entire career. This makes it extremely important for us to 
address pensions and especially the issue of portability. 
Changing jobs should not drastically affect one's pension.
    Millions of Americans have no access to retirement plans. 
Only half of full-time, private sector workers participate in 
an employer-sponsored pension plan. This results in 51 million 
American workers with no pension plan. Pension coverage has 
only increased to 50 percent in 1993 from 48 percent in 1983.
    Small businesses are less likely to have pensions than 
large businesses. While only thirty percent of firms that 
employ between 25 and 49 employees have pensions, seventy-three 
percent of firms that employ over 1000 employees have pensions. 
Only 8% of Americans making below $10,000 per year have pension 
coverage. Fewer women receive pensions than men. The percentage 
of the workforce covered by a pension has stagnated in the last 
20 years. Many firms cite complexity and start-up costs as 
major reasons for not offering pensions.
    Portability is important to improving our pension system. 
Five million people with pension coverage change jobs every 
year. Many workers lose out on their pension because they leave 
their jobs before their pension vests.
    President Clinton's budget included comprehensive pension 
proposals. The proposals are aimed at making it easier for 
employers to offer pensions and for employees to retain 
pensions when switching jobs. The President's proposals are 
targeted to promoting pension plans among small businesses. 
These proposals build on past efforts of the President and 
Congress to simplify pensions. The President's measures would 
boost private pensions and individual retirement savings.
    In the near future, I will be introducing the President's 
pension proposals in the form of legislation. This legislation 
will enhance workers' ability to contribute to an IRA by 
payroll deduction. The bill will provide a tax credit for small 
businesses with fewer than 100 employees for the start-up costs 
of a pension plan.
    The legislation creates new simplified defined benefit 
pension plans for small businesses with fewer than 100 
employees called the SMART plan. The SMART plan is a broad 
based approach that provides participants with a guaranteed 
minimum annual benefit upon retirement. An employee's benefit 
would be 100 percent vested at all times. The bill allows for 
faster vesting of employer matching contributions to defined 
contribution plans. Vesting for the employer match would occur 
at three years instead of five years. This should help with 
portability.
    The bill will also include the expansion of right-to-know 
provisions for workers and spouses and simplification 
proposals. These proposals will help reduce the paper work 
associated with pensions.
    The above described legislation is targeted to improve 
pensions in the areas where I believe the most improvement is 
needed--coverage for small businesses and portability. Now is 
the time for Congress to act. We cannot over look the 
statistics. We are beginning to face what has been commonly 
referred to as the ``graying of America.'' Within thirty years, 
one out of every five Americans will be over age sixty-five. In 
thirteen years, the baby boomers will begin turning sixty-five. 
The baby boomer generation consists of 76 million members and 
will result in Social Security beneficiaries doubling by the 
year 2040.
    We need to take action now to make retirement more secure. 
I see no reason that would prohibit Congress from passing 
legislation to improve our pension system. The way I look at 
the three legged stool of retirement is that the pension leg is 
wobbly. We can make that leg carry its weight by enacting 
pension proposals based on those included in President 
Clinton's budget. All three legs of the retirement stool need 
to be strong.
    I look forward to working with this Subcommittee and the 
full Committee on making it easier for both employers and 
employees to have pensions.
      

                                
      
    [GRAPHIC] [TIFF OMITTED] T5945.019

                                

Opening Statement of Hon. Gerald D. Kleczka, a Representative in 
Congress from the State of Wisconsin

[GRAPHIC] [TIFF OMITTED] T5945.017

[GRAPHIC] [TIFF OMITTED] T5945.018

                                


    Mr. Portman. Mr. Strauss, thank you very much for your 
testimony, and we appreciate your comments, particularly on 
some of the legislative proposals that are before us. On SAFE 
versus SMART, just one simple question. Do you think we can 
reconcile the differences between these two, or should we be 
looking at two separate defined benefit plans and moving 
forward and offering, therefore, more options?
    Mr. Strauss. I think that they serve different purposes and 
work well in combination with each other.
    Mr. Portman. So you're suggesting that perhaps this 
Subcommittee look at enacting both proposals--pushing both 
proposals forward?
    Mr. Strauss. I'm sorry. We're talking about SAFE and SMART 
rather than SIMPLE and this defined benefit concept?
    Mr. Portman. Right. I'm talking here about the 
administration's proposal, which is the SMART plan, and 
Chairwoman Johnson's proposal, which is the SAFE plan.
    Mr. Strauss. I think that since the SAFE and SMART plans 
contain many of the same features that it should be easy to 
work out our differences.
    Mr. Portman. We should give directives on them.
    Mr. Strauss. Yes, sir.
    Mr. Portman. That certainly would be my hope, and then we 
would have one--one--vehicle for smaller businesses on the 
defined benefit side and one on the defined contribution plan, 
the SIMPLE plan.
    Does it make sense, my second question would be, to 
reconcile some of the differences between the SIMPLE plan and 
the SAFE plan or the SAFE/SMART plan? As I read the SAFE plan, 
it seems to have many of the same criteria, which I like. Many 
of the same definitions, which I think is very helpful. But do 
you think that there is a need to try to present one single, 
coherent pension vehicle, or should we be providing these two 
separate options?
    Mr. Strauss. Again, the differences between SIMPLE and the 
SAFE/SMART proposal--I think that the SIMPLE and the defined 
benefit proposal serve different purposes. And for older 
workers--like my father, for example--there is not enough of a 
window for them to save enough, early enough----
    Mr. Portman. Under the SIMPLE plan.
    Mr. Strauss [continuing]. To guarantee them a set benefit 
for life. And so I think that these vehicles serve different 
purposes, but I think they work well in combination.
    Mr. Portman. But you would hope that a smaller business 
would be able to offer both of these options and some workers 
would want to pick up both?
    Mr. Strauss. What we're trying to do here is to provide the 
option for those small businesses who are looking for more 
choices to have the option to provide a true defined benefit 
plan if that's something that they think works for their 
workers.
    Mr. Portman. In your statement, you said that you thought 
that these small business plans should be insured through the 
PBGC and you said that the premium might be less because you 
thought that they might offer less risk. I would say that there 
is less risk in these plans certainly, and I wondered if you 
could give us a sense of what the premium might be?
    Mr. Strauss. I've recommended $5 for the premium.
    Mr. Portman. Five dollars versus roughly $19?
    Mr. Strauss. Nineteen dollars, which is the flat rate 
premium for the single employer plan.
    Mr. Portman. One other general question I have, then I want 
to get to my colleagues. Maybe we'll have time to come back and 
talk about some other issues. But on the issue of PBGC 
generally, in your testimony you didn't address the issue of 
premiums directly. You do have a surplus. I want to commend you 
for that, and I guess we should commend our economy for that. 
And it is on a sound financial basis. The question is, when you 
have a surplus, how much of a cushion is necessary for what you 
described in your testimony as an economic downturn that might 
occur. What's your present thinking of how much of a surplus 
the agency should maintain before we begin to look at the issue 
of premium discounts or premium reductions?
    Mr. Strauss. I think it's important to point out, at the 
outset here, that we've only been operating in the black for 2 
years out of the 24 years that we've been in existence.
    Mr. Portman. You've done better than the Congress. We spent 
almost 30 years trying, and haven't gotten there yet. But go 
ahead.
    Mr. Strauss. And I think that, in order to determine how 
much of a cushion is enough, it requires us to look at all of 
those factors that influence our bottom line. So premium levels 
would be one factor. Our investment strategy would be a factor. 
The interest rates that we use to evaluate the liabilities of 
the plans that we insure is another factor. And so, we're just 
at the beginning of that process right now. But I don't think 
that a 2-year snapshot is an adequate basis on which to make 
long-term decisions about the appropriate premium level. And I 
think that we need to be prepared in the event of a downturn. 
When we look at this 2-year snapshot, we're looking at very 
ideal conditions. The economy is doing very well. Our PBGC 
investments are doing very well. There have been very few large 
plans that have terminated. And I think that we just need a 
longer horizon on which to base a judgment about adjusting 
premium levels. I don't think that every time there's a slight 
change, there should be an adjustment in the premium levels.
    Mr. Portman. Let me push you just a little further on that. 
Can you give us a sense of whether that's 5 or 10 years, and or 
what the surplus level might be as a percentage perhaps?
    Mr. Strauss. I think that there's one other point that I 
should make with respect to premium levels. Because of the 
provisions in RPA, from 1994, with the stricter funding 
provisions, the variable rate premium stream is already coming 
down. And in the year 2000, when the variable rate premium is 
based 100 percent of the 30-year Treasury rate, it will roughly 
cut the variable rate premium in half. So a premium reduction 
is already occurring. Also with respect to the flat rate 
premium--the flat rate premium was set at $19 in 1981--or 1991, 
I should say. And so, if you just look at the impact of 
inflation on that, there's been a 15- or 20-percent reduction 
there. So, I think that all of those factors will need to be 
considered, and we have more sophisticated models that we're 
developing now to help us in this respect. And if I come back 
next year, I can give you much better answers to this question.
    Mr. Portman. I will push no further. Mr. Coyne.
    Mr. Coyne. Thank you, Mr. Chairman.
    Director, I wonder if you could touch on what the biggest 
challenges facing you and the Pension Benefit Guaranty 
Corporation is today?
    Mr. Strauss. I think that the biggest challenge is to make 
sure that we have an adequate cushion to protect the agency in 
the event of an economic downturn. That is, as I indicated, 
when you look at our history, we've only been in the black for 
2 years out of 24 years. And that in order for the plan 
sponsors and the participants whose benefits we insure to have 
confidence in the system, I think that it's important that we 
maintain an adequate cushion to protect the agency in the event 
of an economic downturn. If an economic downturn occurs, there 
will be significantly more plans terminating and the PBGC 
assets will be worth less. And so, that's the eventuality that 
I think we need to be prepared for, and I think that that's our 
biggest challenge.
    Mr. Coyne. I wonder if you could try to give us some idea 
of why employers are beginning to steer away from defined 
benefit pension plans and instead setting up defined 
contribution plans?
    Mr. Strauss. I think that the reasons that the employers 
are steering away from defined benefit plans are basically 
three.
    They're concerned about the complexity of those plans. 
They're concerned about the high administrative costs, and 
they're concerned about unpredictable funding levels. And I 
think that all of those issues are addressed by the SAFE/SMART 
vehicles that this Subcommittee is considering.
    Mr. Coyne. What did PBGC do administratively to get the 
agency off the Federal Government's high-risk list?
    Mr. Strauss. Well, I think that when you look at the 
improvement in our financial condition that it's basically 
threefold. I think the reforms that were passed in 1994--that 
provide for stricter funding limits, the participant 
notification provisions, taking the cap off the variable rate 
premium--are one set of factors that have had a positive impact 
on our bottom line. We've also done enormously well off of our 
trust fund investments. That's had a positive effect on our 
bottom line. And I think that those have been the major 
factors--that coupled with the improvement in the economy 
overall--that result in our condition being vastly improved.
    Mr. Coyne. Thank you very much.
    Mr. Portman. Mr. English.
    Mr. English. Thank you, Mr. Chairman. And I'd like to say, 
Mr. Strauss, we appreciate your being here. I have a couple of 
specific questions that I wanted to vent with you to improve my 
understanding.
    First, in your view, what is the likely level of risk for a 
defined benefit plan maintained by a small versus a large 
business?
    Mr. Strauss. Well, I think, when we look at the vehicles 
that the Subcommittee is considering here, that because of the 
particular design of these plans the risk would be very small. 
And so, it's a design that's not very risky, and there are 
small amounts of money involved here. So the combination poses 
very little risk to the PBGC.
    Mr. English. With regard to the SMART plan, I think that 
other witnesses today intend to take issue with limitations on 
compensation for determining an individuals annual benefit, 
which I think is established in that proposal at $100,000. Why 
do you consider this to be an important positive attribute of 
the President's plan, if you do?
    Mr. Strauss. Well, in developing our plan, we attempted to 
target that part of small business where the coverage was the 
poorest, and the costs were the highest. And so that was our 
primary focus. But, I would be happy to look into any issues 
that you would like to raise in this respect.
    Mr. English. Well, I hope you'll have an opportunity to 
review some of the other testimony that's coming before us 
today, because I think some of it speaks directly to that. My 
final question: You indicated in your testimony that with the 
SMART plan the small business participating may have to 
contribute extra funds if the participant chooses an annuity 
form of benefit in the SMART Trust. The SAFE plan, as I recall, 
does not include such a provision because of concerns that this 
possible additional liability might discourage small businesses 
from participating under the terms of this plan. A small 
business has limited purchasing power when buying an individual 
annuity contract. If we followed the SMART plan approach here, 
would the PBGC be willing to consider developing methods by 
which small businesses adopting the plan could purchase 
annuities which would be more competitively priced?
    Mr. Strauss. I'm aware of the issue that you raise, and 
it's something that we're looking into and that we're 
attempting to address. Yes, sir.
    Mr. English. Thank you. Well, in that case, we'll look 
forward to the end result of your efforts.
    Mr. Chairman, I appreciate the chance, and I'll yield back 
the balance of my time.
    Mr. Portman. Thank you, Mr. English.
    Mr. Kleczka.
    Mr. Kleczka. Thank you, Mr. Chairman.
    Mr. Strauss, how large is the surplus that you're talking 
about today, in dollars and cents?
    Mr. Strauss. One week from Monday we will release our 
annual report for last year, and that will give you an accurate 
number with respect to our surplus. It's going to be released 1 
week from Monday.
    Mr. Kleczka. OK, what is the ballpark on that number coming 
out?
    Mr. Strauss. I think that, while the auditors and the 
lawyers are going over the number, the best answer that I can 
give you is that clearly it's going to be a positive number, 
and we can release the exact number 1 week from Monday.
    Mr. Kleczka. OK, now this is your second year of a surplus?
    Mr. Strauss. And this will be our second year of a surplus, 
yes, sir.
    Mr. Kleczka. What was the surplus last year?
    Mr. Strauss. Sorry.
    Mr. Kleczka. What was the surplus last year?
    Mr. Strauss. $869 million.
    Mr. Kleczka. OK, and you assume that we're going to have 
another surplus this year?
    Mr. Strauss. Yes, sir, it will be a larger number, I can 
assure you of that.
    Mr. Kleczka. That was my next question.
    Mr. Strauss. Thank you.
    Mr. Kleczka. OK, so it would be more than $869 million or 
would it be lower than that amount?
    Mr. Strauss. No.
    Mr. Kleczka. OK, that's clearly good news because we've 
been working with PBGC for years. Every time you've appeared 
before the Subcommittee--or your predecessors--it was always to 
indicate the bad news and this Subcommittee had to either 
adjust the premium or do other things to make the fund solvent.
    Are we still experiencing problems with the big four 
industries in this country, that is, steel, airlines, tire 
rubber, and auto? Are we still seeing underfunding in those 
segments of our economy?
    Mr. Strauss. Yes. Generally, the answer is yes.
    Mr. Kleczka. So, if in fact, we would see a downturn in the 
economy of any prolonged degree, we would probably see problems 
in those four areas; thus, that surplus would be gone in a 
short while, as I understand it. Is that not somewhat accurate?
    Mr. Strauss. It's entirely possible. And so when you look 
at the surplus in terms of our large plans that have terminated 
historically, the surplus would equal three or four of the 
large terminated plans.
    Mr. Kleczka. OK. So before we start talking about reducing 
premiums, let's just hold on and see what happens to the 
economy on a longer basis, knowing very well that there are 
still a lot of large plans that are underfunded. And actually, 
the large plans tend to be the problem plans, not the small 
business plans like my friend Congressman English talks about. 
Small business plans usually do not pose a big liability 
problem even though they might have some problems. Is that 
somewhat accurate?
    Mr. Strauss. Yes. It is.
    Mr. Kleczka. OK, let me ask you, in the past you produced a 
list of 50 major corporations in the country who had severely 
underfunded pension plans. Do you not publish that list 
anymore?
    Mr. Strauss. We did away with the top 50 list because we 
were singling out companies that were meeting all the legal 
requirements that did not necessarily pose any risk to the 
participants in their plans or to the insurance program. I 
think that here's an example of where the new tools that we 
were given in the 1994 law are working. So the stricter funding 
limits, the participant notifications, which I know that you're 
very familiar with, where there is a very high threshold. If a 
plan is less than 90-percent funded, then the plan sponsor has 
to inform every single participant. When you look at the plans 
that we've taken in historically at the PBGC, only 2 percent of 
them have been funded more than 75 percent. So this is a very 
high level--a very high threshold--at which participants are 
notified. And so I think that because of this better tool, it 
made the top 50 list less necessary.
    Mr. Kleczka. But publishing the top 50 list did not mean 
that these 50 major employers of the country were deficient in 
their payments or whatever. It's just that the plan was 
underfunded. And I think the 1994 law, as you indicated, helped 
promote more--or a better--level of funding of plans.
    Now part of that law, as you indicated--and let me just ask 
you to expand--was a notification to employees who have a 
definite part in this whole program and that notice was to 
provide an English--simple English--explanation to employees 
that their plan was somewhat underfunded. Is that being 
accomplished and what is the result of that?
    Mr. Strauss. It's being accomplished. It's working well. 
Many of the plans are using the model notice that we provided. 
There have been a significant number of cases where plans have 
funded up to the 90-percent level so they don't have to send 
out the notice. And so, we know that that's working very well. 
We continue to monitor it and think it's a great success story.
    Mr. Kleczka. I think it's an important part of that law 
because at least it gives the employee the heads up that there 
could be a problem. Prior to that law change, the only time 
they received notice of a problem with their plan is when they 
received a notice from the PBGC indicating that you were taking 
over the pension plan.
    One last question, Mr. Chairman, if I might. Even though 
your agency has no responsibility over retiree health plans or 
retiree benefits in the life insurance area, there was some 
thought on the part of this Member of Congress to expand at 
least the health area because of a problem we had in Milwaukee 
with the Pabst Brewing Company. More recent, many of us are 
receiving letters and calls from Sears' former employees 
because Sears is planning on reducing dramatically the life 
insurance benefit that they had promised to their employees. 
Now, it's not a responsibility of yours; but nevertheless, is 
there any problem with the funding or the balances in the Sears 
retirement program, so these retirees might receive another 
notice from you or from Sears that there's now a problem with 
the retirement benefit?
    Mr. Strauss. I'll be happy to check that for you and get 
back to you on that.
    Mr. Kleczka. OK, I'd appreciate that because we are 
receiving letters from constituents.
    [The following was subsequently received:]

Funding Level of the Sears Retirement Plan

    The principal defined benefit retirement plan of the Sears, 
Roebuck Co., as of January 1, 1996, the latest available data, 
was 80 percent funded. The plan had $1.8 billion in assets and 
$2.2 billion in liabilities. The plan was then paying benefits 
to 32,000 retirees. It had 154,000 active participants and 
another 41,000 vested participants who were no longer employed 
by the company.
      

                                


    Mr. Kleczka. Thank you, Mr. Chairman, for your indulgence.
    Mr. Portman. Mr. Tanner.
    Mr. Tanner. Thank you very much, Mr. Chairman.
    Mr. Strauss, thank you for being here. I read with great 
interest your statement. I only have one question. You talk 
about the fact that only 20 percent of workers within firms 
with fewer than 100 employees have some sort of pension 
coverage. You talk about the SAFE and SMART plans and go on to 
say that ``PBGC cannot guarantee these plans without insurance 
premium; however, because these plans, by their design, may 
pose less risk, we propose that they pay a substantially 
reduced premium.'' Could you expand on that idea, please?
    Mr. Strauss. I think that, with respect to the PBGC 
premium--from some of the discussions that I've had with the 
pension professionals who would actually be marketing these 
plans, they feel that having a plan that's insured by the 
government will make it more marketable. And as long as we can 
keep the premium modest, the PBGC insurance would actually add 
value to them and make it easier to sell these things.
    Mr. Tanner. You haven't fleshed that out. It's just that 
the marketing aspect of it is the driving force?
    Mr. Strauss. Well, what we've tried to do is to work with 
the practitioners who are actually going to be selling these 
things, to get a sense from them what sort of vehicle makes 
sense. And I can recall a discussion that I had with one 
benefits consultant where he said that the typical small 
business that would be interested in something like this was a 
small business that has matured to some extent, where the owner 
of the business has a corps of longtime, loyal employees and 
that we have to create incentives for that owner and for that 
corps of longtime employees to get them to think about offering 
this sort of defined benefit pension plan.
    The advantage of creating those incentives and getting them 
to consider a plan like this, as I indicated earlier--I was 
talking about the situation of my father who, very late in 
life, got a job when he was working as a janitor that was 
covered by a defined benefit pension plan where, because of 
that, he now has a small amount of guaranteed income that he 
can look forward to for the rest of his life. And so, what 
we're trying to do here is to create incentives for the average 
small business owner who makes about $55,000 a year to offer 
the sort of defined benefit plan that will benefit him, the 
corps of workers who've been with them for a long time, but 
also the low-paid workers like my father.
    Mr. Tanner. OK. I follow, you.
    Thank you, Mr. Chairman.
    Mr. Portman. Thank you.
    Mr. Strauss, just a couple of followup questions. First, to 
your line of questions with Mr. Tanner. It seems to me that it 
would make sense for the SAFE plan--for the SAFE/SMART plan, 
however it comes out--I wonder if there's a way that we can 
combine those two acronyms to track as closely as possible the 
outlines of the SIMPLE plan. And I think it's fair to say that 
the SIMPLE plan has caught on. It's being explored, certainly 
by a lot of small businesses in my district. I know it's 
selling like hot cakes. But one of the things I noticed, as I 
looked today at the testimony, is that whereas, the SAFE plan, 
again, tries to follow the criteria and the definitions as 
closely as possible and also the compensation levels as closely 
as possible, the SMART plan imposes some lower limits. In 
particular, under SAFE, the annual compensation which can be 
considered under the plan is the same as it is under SIMPLE--
$160,000. And SMART has a lower limit. I assume that's targeted 
more toward folks who really need it and people at the low-
income levels. Do you think that that lower limit is going to 
discourage some adoption of the plan and shouldn't we be, as I 
stipulated earlier, trying to keep this as simple as possible 
so that the two plans have as much as possible the same 
criteria?
    Mr. Strauss. We certainly agree about the need to keep it 
as simple as possible and make it as easy to administer as 
possible. Regarding the pension professionals that we deal 
with, the significant issues that they raised are that they are 
concerned about complexity of these programs, and they're 
concerned about the steep administrative costs. And so, that's 
clearly what we're trying to address here, and to do it in a 
way that the net result is a predictable, secure benefit for 
life. And so, those are the objectives that we're working 
toward.
    What we focused on here is that part of small business 
where the coverage is the lowest, where the costs were the 
highest. We're willing to expand that dialog with you.
    Mr. Portman. All right. So there's some flexibility there, 
and we have the same goal in mind which is to keep it as 
identical as possible to the other criteria.
    Jumping to another issue quickly--multiemployer plans. I 
know you've got a lot of different areas that you have to look 
into, and this is one of them. I think there are about 2,000 
multiemployer plans out there that are under your purview. And 
about 50 or so that are underfunded.
    Having heard about this from my district where we've got 
one of these underfunded plans--their concern is that plan 
trustees are granting benefit increases in these plans even 
though they again are chronically underfunded and increasing 
the liability even though there is no control over the 
situation by the employer. Is there a way to address this? 
Maybe by designing a solution that only affects the underfunded 
plans? Making sure a plan is adequately funded before there are 
new benefit increases? Have you focused on this area? Do you 
have any suggestions as to how to address the problem?
    Mr. Strauss. I haven't focused on this area. I can tell you 
that overall the system is sound--we're required by law to do a 
5-year study. That in the last 5-year study, the funding level 
of these plans overall was shown to be improving, that out of 
these 2,000 plans, we've only taken in--I think--19 in our 
entire history. Under this program, unlike the single employer 
program, we've been reporting a surplus since 1981.
    Mr. Portman. Right.
    Mr. Strauss. And so I'd be happy to look into your specific 
questions and get you the answers.
    Mr. Portman. OK. Mr. Kleczka, do you have any additional 
questions?
    Mr. Kleczka. Yes, Mr. Chairman. Thank you very much. Mr. 
Strauss, one of the ideas I had and wanted to share and get 
your reaction was to expand the area of responsibility for the 
Pension Guaranty Corporation and either change the name to 
reflect Pension and Benefit Guaranty Corporation or Pension and 
Healthcare Benefit Guaranty Corporation I'm thinking now of a 
situation in my district with the Pabst Brewing Company, 
wherein they promised early retirees and regular retirees 
healthcare benefits. Then 1 day, with no notice to its 
retirees, Pabst Company was no longer going to provide benefits 
to its retirees. These people were left high and dry. For the 
ones who were over 65, we did pass legislation in the last 
budget bill which waived the penalty for these folks getting 
into Medicare. Prior to that, there would have been a financial 
penalty for those folks. But for other employees, especially 
those in their fifties, there was no place to go except to the 
private market, and if there were any preexisting conditions, 
these employees were faced with a very, very high premium.
    Now for companies that offer and give health care benefits, 
I would like to get your thoughts on the possibility to provide 
a similar system like we do for the pensions where there would 
be a small premium paid into your agency to cover those 
employees who would lose their health benefits which were part 
of their retirement plan. Knowing full well that a pension is 
very, very important in your later years, but so is health care 
coverage. If you made your retirement decisions based on the 
probability or the guarantee that your employer is going to 
offer them and suddenly its taken away--you're in some 
difficult straits.
    So the question is, what would be your reaction to 
expanding the PBGC to include not only pensions but also 
benefits that were guaranteed and provided by the employer, 
like health?
    Mr. Strauss. As tempted as I am to expand my mandate here a 
little bit this afternoon, I'll be happy to look into those 
issues for you and get back to you. I'm aware of your concerns 
and we can look into them.
    Mr. Kleczka. What would be your reaction to having this 
additional responsibility?
    Mr. Strauss. I think that there's an agency within the 
Department of Labor--the Pension Welfare Benefits 
Administration--that has primary jurisdiction in this area----
    Mr. Kleczka. Well, in the situation with the Pabst Brewing 
Company went to them and they had no authority over the 
situation either. So that clearly is not the backup agency to 
protect employees' benefits.
    Mr. Strauss. I'll be happy to look into this some more and 
get back to you on it.
    Mr. Kleczka. Thank you.
    [The following was subsequently received:]

    The Administration is very concerned about the plight of 
retirees when an employer drops their health insurance 
coverage. The termination of health benefits can be especially 
serious for pre-Medicare eligible retirees who may find it 
impossible to obtain affordable coverage elsewhere. However, we 
do not believe the answer to this problem is for the Pension 
Benefit Guaranty Corporation to insure retiree health benefits.
    In the absence of comprehensive health reform, a federal 
guarantee of retiree health benefits is not practical and would 
potentially create an open-ended liability for the United 
States Government. Retiree health benefits are very different 
from defined benefit pension plans. Unlike defined benefit 
pension plans, it is very difficult to accurately determine 
present value of benefits in a particular case. Retiree health 
benefits are typically not funded in advance, not vested, and 
are often terminable at the discretion of the plan sponsor. The 
benefit terms can also differ widely, with differing employee 
contribution levels, co-payments, and other benefit and 
treatment provisions. The potential liability associated with 
these benefits can vary widely depending on the terms of the 
plan, and assumptions of health costs and technology growth.
    Providing a Federally guaranteed retiree health benefit 
program in the absence of more comprehensive plan standards 
could actually encourage termination of these health plans. It 
would subsidize employers who break their promise by taking 
over their benefit payments for them. The PBGC guarantees 
payment of promised pension benefits when employers in 
financial distress are unable to fulfill those promises.
    The Administration believes employers must clearly state 
the terms of their retiree health benefit promise, and be held 
accountable to that promise. Too often, employers have been 
able to cut retiree health benefits under fine-print 
technicalities or disclaimers in their plan documents, even 
though they are contrary to assurances of coverage they have 
made to their employees and retirees. The Administration has 
aggressively intervened in litigation in these cases by filing 
amicus briefs supporting the rights of retirees to be heard and 
for preserving the health benefits of retirees involved.
    A more practical and less disruptive approach than a 
Federal guarantee is to provide retirees the opportunity to 
obtain affordable health coverage, especially where their 
benefits have been terminated. The Administration has recently 
proposed legislation to require that retirees age 55 or older 
whose benefits are terminated be allowed to buy into their 
former employers' plans for active employees at a price not 
greater than 125% of the average cost for the group. The 
legislation would offer retirees who lose benefits access to 
affordable coverage until they become eligible for Medicare. It 
would also limit employers' ability to walk away from their 
obligations to their retirees.
      

                                


    Mr. Portman. Other questions.
    [No response.]
    Mr. Portman. Mr. Strauss, thank you very much. We'd look 
forward to working with you on ``SIMPLE,'' ``SAFE,'' and 
``SMART,'' and other ways to expand retirement savings 
opportunities. We'd like to call our next panel now. Mr. 
Strauss, thank you very much for your testimony this afternoon.
    Our next panel consists of a number of experts in the 
pension area. Ron Merolli, who's director of Pension 
Legislative and Technical Services, National Life Insurance 
Co., Montpelier, Vermont. He's here on behalf of the American 
Council of Life Insurance. Gregory Moore, deputy director of 
the Pension Rights Center. James V. Leonard, vice chairman, 
Engineering Employment Benefits Committee, on behalf of the 
Institute of Electrical and Electronics Engineers of the United 
States. Gail S. Shaffer, who's executive director of Business 
and Professional Women/USA. Michael E. Callahan, who's 
president of PenTec, Inc., Cheshire, Connecticut, on behalf of 
the American Society of Pension Actuaries. Gregory J. Fradette, 
Sr., the agency principal of the Greg Fradette Agency, Inc., of 
Bristol, Connecticut.
    Are you all situated? Mr. Merolli, we'd like to start with 
you this afternoon, if we could. Your full statements can be 
made part of the record. We ask you to summarize your oral 
remarks in 5 minutes. So you'll see the green light come on and 
then moving to the orange and finally to the red after 5 
minutes. We ask you to keep your formal presentation to those 5 
minutes, but would be happy to add anything else to the record. 
Mr. Merolli.

STATEMENT OF RON E. MEROLLI, DIRECTOR, PENSION LEGISLATIVE AND 
 TECHNICAL SERVICES, NATIONAL LIFE INSURANCE CO., MONTPELIER, 
    VERMONT; ON BEHALF OF AMERICAN COUNCIL OF LIFE INSURANCE

    Mr. Merolli. Thank you, Mr. Chairman. My name is Ron 
Merolli of National Life Insurance Co., Montpelier, Vermont. 
I'm speaking today on behalf of the American Council of Life 
Insurance, ACLI. ACLI is the major trade association of the 
life insurance industry. We are very concerned with issues 
involving the continued viability and expansion of our 
retirement system. We would like to express our appreciation to 
the Subcommittee for inviting us to share our views and those 
of the other speakers on the obstacles facing small employers 
who wish to establish retirement programs, and on a retirement 
program that hopefully will overcome many of those obstacles. 
We have also submitted written testimony for the record.
    We have been involved in assisting small businesses in 
fulfilling their retirement objectives for many years and fully 
appreciate their obstacles. For years, the incentives for 
establishing retirement programs have been eroded by almost 
annual legislation that used our pension system to raise 
revenue to pay for unrelated programs. The constant burden of 
complex regulations and ever-tightening restrictions in order 
to meet short-term revenue objectives historically discouraged 
small business participation. As a result, plan formation, 
particularly in the defined benefit arena, declined 
significantly. Small businesses often do not have the financial 
resources to hire high-priced consultants to design or maintain 
their plans. Therefore, it's critical that their pension 
expenses be used primarily for providing retirement income.
    In the last several years, the Small Business Job 
Protection Act of 1996 and the Taxpayer Relief Act of 1997 
brought changes that are very favorable to individual savers 
and to small businesses. We're very happy that there is strong 
bipartisan support for reforms, particularly in a simplified, 
defined benefit type program for small business owners. We are 
particularly interested in and support the concept contained in 
H.R. 1656, the Secure Assets for Employees Plan Act of 1997, 
the SAFE Plan, and identical legislation contained in both S. 
883 and S. 889.
    SAFE will encourage small businesses to adopt defined 
benefit plans. We also believe SAFE is superior to the SMART 
plan proposal which is included in the administration's fiscal 
year 1999 proposed budget as we will discuss later. SAFE can be 
either an annuity or a safe trust. The ACLI supports permitting 
all types of business entities to participate in SAFEs--
including corporations, nonprofits, governmental units and 
other unincorporated entities--similar to how SIMPLE is 
handled. Under SAFE, each year the employer contributes the 
amount necessary to fully fund a benefit for any current or 
prior year of service that is earned by the employee in that 
year, provided the employee earns at least $5,000 in 
compensation, whether or not the employee is working on the 
last day of the year. To accomplish this, the proposal uses age 
65 as the retirement age. Current mortality and expense 
assumptions are used and the funding of benefits are determined 
assuming a 5-percent rate of return.
    However, while we favor SAFE, we are concerned with that 5 
percent guarantee. We feel there should be a reasonable range 
of 3 to 5 percent. If the basis for the guarantee is 5 percent, 
insurers will need to make long-term investments that have 
yields higher than 5 percent in today's very low interest rate 
environment. If interest rates drop further, 5 percent causes 
financial difficulties. The trend is down and 5 percent could 
put insurers at long-term risk. We are conservative investors--
investing mainly in high-quality bonds and mortgages. The 
interest earned on the investments is competitive. Therefore, 
to guarantee an interest rate for the long term of 5 percent--
when long-term rates are currently hovering at less than 6 
percent and where they could decrease to less than 5 percent, 
raises serious concerns. If rates are declining, this may tempt 
insurers to take more credit risks.
    A SAFE annuity is approved by each State and their primary 
concern is how products impact a company's financial bottom 
line. It may be tough to get a product approved in a State with 
a long-term guarantee of 5 percent. Also based on an informal 
survey, we found no company that currently guarantees 5 
percent. The full guarantee should be historically sustainable 
which it would be at 3 percent--that's what most companies 
guarantee.
    What we could do though is offer 3 percent and also use 
products where employees share in the investment returns of the 
insurer's general account. The SAFE annuity contract holder 
could do better in years when returns are better.
    We do not feel that PBGC insurance is needed for SAFEs. 
SAFES are always fully funded and there's no need for PBGC 
coverage. We also feel that SAFE plans should be fully 
portable. We are encouraged that there's bipartisan support for 
a simplified defined benefit plan. However, we feel that the 
SAFE plan is superior to the SMART plan.
    SMART, which uses a trust only, and not an annuity, 
specifically excludes professional service employers. It can't 
be established if the employer maintained another defined 
benefit plan in the last 5 years. Matching contributions will 
be limited to 4 percent. It unnecessarily requires PBGC 
premiums. It doesn't allow past service credit--which I think 
is very important for 50-year-old employees who wanted to make 
up time to get their plans funded in time for their retirement, 
it uses an unrealistic $100,000 compensation maximum, and it 
has a low-benefit percentage. In addition to SAFE, there are 
other proposals that we support as well--including relaxing the 
top-heavy rules, repeal of the 150-percent current liability 
funding limit--and others.
    We applaud Congress and the administration for embracing 
the concept of a simplified defined benefit approach and we 
promise to work diligently with you to implement a workable 
program. Thank you very much.
    [The prepared statement follows:]

Statement of Ron E. Merolli, Director, Pension Legislative and 
Technical Services, National Life Insurance Co., Montpelier, Vermont; 
on Behalf of American Council of Life Insurance

    My name is Ron E. Merolli. I am Director of Pension 
Legislative and Technical Services for National Life Insurance 
Company at the Home Office in Montpelier, Vermont. I am 
speaking today on behalf of the American Council of Life 
Insurance (the ACLI).
    The ACLI is the major trade association of the life 
insurance industry, representing 532 life insurance companies. 
These companies hold 89% of all the assets of the United States 
life insurance companies and 90% of the insured pension 
business. With such a large commitment to the retirement 
security of millions of Americans, the insurance industry is 
vitally concerned with issues affecting the continued viability 
and expansion of the nation's private retirement system.
    I would like to express our appreciation to the members of 
the Committee for inviting us to state our views on the 
obstacles facing small employers who wish to establish 
retirement programs and on an exciting new retirement program 
that hopefully will overcome many of those obstacles.
    My company and other ACLI member companies have been deeply 
involved in assisting small businesses in fulfilling their 
retirement objectives for many years. Thus, we have a full 
appreciation of the difficulties small businesses have faced in 
meeting those objectives. These small businesses have had to 
wade through minefields of complex tax and labor laws and 
regulations. For many years, the incentives for establishing 
retirement programs have been eroded by almost annual 
legislation that used our private pension system to raise 
revenue to pay for unrelated programs. Legislation was crafted 
not to enhance retirement security for present and future 
generations, but as a way to offset non-related federal 
expenditures to meet budget goals. The constant burden of 
complex regulation and ever tightening restrictions on 
contributions and benefits in order to meet short term revenue 
objectives has historically discouraged participation by many 
small businesses in the private pension system. As a result, 
qualified retirement plan formation, particularly in the 
defined benefit arena, has declined significantly.
    Qualified plans are costly for small businesses, that often 
do not have the financial resources to hire high priced 
consultants to design and maintain their plans. The reporting, 
disclosure, and administrative requirements imposed by federal 
laws and regulations are very complex, which often has 
translated into increased costs that are too burdensome for 
many small employers to absorb. It is critical that the small 
business owner's pension contributions are used primarily for 
providing retirement income to retirees and not for 
administering the plan.
    However, with the passage of the pension and benefits 
provisions of the Small Business Job Protection Act of 1996 
(SBJPA96) and the Taxpayer Relief Act of 1997 (TRA97), small 
businesses finally had something to cheer about! The onerous 
family aggregation rules and the Code section 415(e) combined 
plan limits were repealed, 401(k) plan testing safe harbors and 
other simplifications were enacted, the highly compensated 
employee and compensation definitions were simplified, various 
reporting and disclosure rules were eliminated, traditional 
IRAs were enhanced and the new ROTH and SIMPLE IRAs were 
created, to name but a few of the changes favorable to both 
individual savers and to small businesses.
    Nevertheless, much work still needs to be done, and we are 
very encouraged that there is strong bipartisan support for 
additional pension reform initiatives, including specific 
initiatives for small businesses, particularly in one area 
where the need is greatest. (We list other measures we believe 
will encourage small businesses to adopt and maintain pension 
plans at the end of the testimony.) While many of the recent 
enhancements have focused on ``defined contribution type'' 
programs such as SIMPLE, SEPs, and various types of profit 
sharing plan designs, one area that still needs addressing is 
the concept of a simplified ``defined benefit type'' program 
for small business owners. Small business plan coverage is 
still woefully inadequate and defined benefit plan coverage is 
still shrinking. Therefore, it's encouraging that both Congress 
and the Administration have embraced the view that what's 
needed now is a new simplified, tax favored defined benefit 
type retirement plan to complement the already established 
SIMPLE defined contribution plan.
    We have examined several proposed plan designs, and we are 
particularly interested in and support the concept contained in 
H.R.1656, the ``Secure Assets For Employees (SAFE) Plan Act of 
1997'' and in the identical legislation contained in both S.883 
and S.889. The ACLI believes that SAFE will encourage small 
business employers to adopt defined benefit plans and reverse 
years of defined benefit plan erosion. We believe the SAFE plan 
is superior to the Secure Money Annuity or Retirement Trust 
(SMART) plan proposal as included in the Administration's 
fiscal year 1999 proposed budget, as we will discuss later. The 
ACLI supports expressly permitting all types of business 
entities to participate in SAFE plans, including corporations, 
S corporations, non-profits, governmental units, and 
unincorporated partners, sole proprietors, and owner employees. 
We do have one major concern with the SAFE proposal.
    The ACLI is concerned with the requirement in H.R.1656 that 
a 5 percent interest rate be used in computing the amount 
required to be contributed by an employer each year under a 
SAFE Annuity. We believe that the legislation should provide 
for a reasonable range of interest assumptions of 3 to 5 
percent that can be used to fund benefits.
    If the underlying interest basis for the guaranteed 
retirement benefit is 5 percent, insurers will need to make 
long term investments that have yields in excess of 5 percent, 
which is difficult in today's low interest rate environment. 
Moreover, if interest rates were to continue to drop in the 
future, the 5 percent guarantee could cause insurers financial 
difficulties. Although no one can predict how interest rates 
will move, it is interesting to note that the annual change of 
the net rate of return on the general account assets of 
insurance companies over the past ten years has been negative 
2.2 percent, and for 1995-96 was negative 1.9 percent. The 
trend is clearly down and the 5 percent interest rate guarantee 
could put insurers at considerable risk for the long term.
    Our industry recognizes that our annuity products are 
designed to provide long term financial protection and 
security. We are conservative investors, investing mainly in 
high quality bonds and mortgages, and the interest earned on 
these investments is competitive. Therefore, to guarantee an 
interest rate for the long term (5 percent), when long term 
rates are currently hovering at less than 6 percent and where 
the very real possibility exists that they will decrease to 
less than 5 percent, raises serious concerns for our industry. 
Moreover, a SAFE Annuity will have to be approved by each 
state's insurance commissioner, and their primary concern is 
how any new product impacts a company's financial condition. 
Companies may very well have difficulty getting a product with 
a long term guarantee of 5 percent interest approved in the 
states in which they do business. Also, based upon an informal 
survey of various annuity providers, we found no company that 
currently guarantees a 5 percent interest rate. The floor 
guarantee should be at a rate which is reasonable to believe 
will always be sustainable based on historical records, which 
is 3 percent. That is the floor rate that most companies are 
currently guaranteeing in their products.
    If it is felt that a 3 percent guarantee is too low, the 
other option is to allow employers to choose a participating 
SAFE Annuity. Such a product could offer a 3 percent guarantee 
and provide the employees an opportunity to share in the 
investment returns of the insurer's general account, thereby 
assuring that the SAFE Annuity contractholder could do better 
than the guaranteed rate of return in years when the general 
account returns are better.

                             PBGC Insurance

    The Council agrees that PBGC insurance coverage should not 
be required in any SAFE plan. A SAFE Annuity is a fully 
annuitized defined benefit, and consistent with present law 
annuity rules, should be exempt. The cost of PBGC insurance 
coverage is an additional expense that often makes defined 
benefit plans unaffordable for many small employers.

                              Portability

    Since each participant's benefit is kept in a separate 
account, all benefits in all SAFE plans are fully portable. 
Portability of pension assets is critically important. The 
small business area is where many employees enter the job 
market, where many new jobs are created, and where substantial 
turnover occurs. Ease of movement for SAFE plan assets is a big 
plus.

                             SAFE and SMART

    As mentioned earlier, the Council is encouraged that there 
exists strong bipartisan support for a tax favored simplified 
defined benefit program for small businesses. We have examined 
the alternative proposed by the Administration (The Secure 
Money Annuity or Retirement Trust (SMART)), and we believe that 
SAFE is the better option for the following reasons.
    1. SMART specifically excludes professional service 
employers from establishing a plan, prohibits an eligible 
employer from establishing a plan if the employer maintained 
another defined benefit plan in the last 5 years, and limits 
matching contributions to 4% if SMART is maintained with a 
401(k) plan.
    These rules are counterproductive to new plan formation and 
will discourage participation in plans.
    2. SMART would unnecessarily require a PBGC premium for 
trusts (albeit less than for other defined benefit plans. SAFE 
imposes no such requirement.
    3. SMART does not allow for any past service credit. SAFE 
does and this is a very attractive feature for small business 
owners.
    4. SMART uses an unrealistic $100,000 compensation maximum. 
SAFE uses the current law qualified plan limit of $160,000 
(indexed).
    5. SMART's minimum defined benefit is only 1 or 2 percent, 
increasing to 3 percent only during the first 5 years of the 
plan. SAFE's benefit formulas are more realistic.
    In closing, the Council believes that SAFE is an important 
step towards expanding retirement plans for small businesses, 
we believe that small plan formation will increase if SAFE is 
adopted.
    In addition to the SAFE proposal, we believe the following 
list of pension proposals will greatly simplify the pension 
rules for plan sponsors, particularly small businesses, and 
thus will lead to expanded pension coverage for employees.

A. Relax top-heavy rules

    1. Repeal family attribution applicable to top-heavy rules
    2. Employee deferrals not counted for purposes of top-heavy 
rules
    3. Matching contributions satisfy top-heavy minimum 
contribution requirements
    4. All 401(k) safe harbor plans deemed to satisfy top-heavy 
rules

B. Complete repeal of the 150% of current liability full 
funding limit


C. Allow plan loans for self-employed individuals


D. Repeal age 70 minimum distribution requirement for small 
business owner-employees (5% owners)


E. Expand retirement savings by repealing 25% of compensation 
limit for defined contribution plans


F. Repeal multiple-use test for 401(k) plans (the defined 
contribution plan version of section 415(e))


G. Simplification of Section 404 (pension deduction rules)

    1. Allow plans to use section 415 definition of 
compensation for deduction purposes
    2. Exclude employee 401(k) contributions from 15% deduction 
limitation
    3. Repeal combined plan deduction limitation
    ACLI and other trade associations that support small 
business hope this Committee will consider these proposals this 
year.
    Our private pension system offers the best hope of 
providing the retirees of America's small businesses with a 
secure and dignified retirement. A substantial number of 
workers not covered by a retirement plan work for small 
employers in the private sector. The ACLI applauds the fact 
that Congress and the Administration have embraced the concept 
of a simplified defined benefit approach for small business, 
and we will work with you to implement such a program.
    I very much appreciate being given the opportunity to 
deliver the ACLI's views. I am happy to respond to any 
questions you may have.
      

                                


    Mr. Portman. Thank you, Mr. Merolli.
    Mr. Moore.

     GREGORY MOORE, DEPUTY DIRECTOR, PENSION RIGHTS CENTER

    Mr. Moore. Thank you, Mr. Chairman. My name is Gregory 
Moore and I'm the deputy director of the Pension Right Center 
public interest group that works to protect and promote the 
pension interest of workers, retirees and their families. Thank 
you very much for inviting us to testify on the critical issue 
of pension coverage.
    As Chairwoman Johnson noted in announcing this hearing, 
over 50 million U.S. workers have no pension coverage of any 
kind and most of these work for small employers. Based on these 
numbers, half of this country's workers will retire with Social 
Security benefits as their sole source of income. Given that 
the current average Social Security benefit is $8,900 
annually--or $24.49 a day--it is clear that Social Security 
alone cannot provide retirees with a decent quality of life.
    While distressing, the fact that working Americans have so 
little to rely on in their retirement years should come as no 
surprise. For much of the past decade, emphasis on retirement 
income has shifted from employer paid pension plans to employee 
funded savings plans. Yet all indications are that the typical 
worker in this country cannot put aside enough money to retire 
in a voluntary savings plan early enough in their career to 
accumulate the amounts necessary to provide an adequate 
supplement to Social Security.
    A person earning the median $28,000 a year needs to set 
aside at least one-quarter of a million dollars for retirement. 
Yet most recent government statistics show that the typical 
household has only $15,000 in their 401(k)-type plans. The lack 
of sufficient savings for retirement is understandable--even 
predictable--given several trends in employee wages and 
benefits. Between January 1976--when many of ERISAs provisions 
became effective--and January 1998, wages for production 
workers in this country declined 28.3 percent when adjusted for 
inflation. The declining value of a paycheck, viewed in concert 
with dramatic increases and employee healthcare costs, goes a 
long way toward explaining why retirement savings are so low. 
Indeed, in light of these facts, it is almost unrealistic to 
expect American workers to choose to save.
    Compounding the problem is the fact that small businesses 
face numerous obstacles to establishing and maintaining defined 
benefit plans. From the small business owners' perspective, 
significant startup costs, administrative expenses and 
demanding funding requirements can make traditional plans cost 
prohibitive. Lack of affordability and complex formulas limit 
the attractiveness of the defined benefit plans to even 
employees. Fortunately, several bills now before Congress seek 
to address the legitimate, financial concerns of small 
businesses and of the retirement needs of those workers.
    One such bill is the SAFE bill. SAFE would provide small 
business owners with a simplified defined benefit option. SAFE 
plans will allow employers flexibility in deciding from year to 
year whether they can afford to contribute--a very attractive 
feature for small business owners. Employers would be permitted 
to give pension credit for years worked before the plan started 
and spread the cost of past service liability over as much as a 
decade. SAFE plans, unlike saving plans, assure that money will 
be set aside for individuals at all income levels. These plans 
would preserve retirement money for retirement. It would 
provide professionally pooled management. Most of these SAFE 
provisions are typical features of the traditional pension 
plans. At the same time, SAFE plans would also include the most 
attractive features of 401(k)s. All contributions would be 100 
percent vested. They would offer rules that are simple; 
benefits that are portable; and formulas that are fair to lower 
paid and shorter service workers.
    The Pension Right Center supports the major concepts 
incorporated in SAFE proposals. Yet, we believe that this 
legislation could be strengthened in a number of key aspects.
    First, we urge you to adopt joint and survivor protection 
for the SAFE annuity. Second, to provide Pension Benefit 
Guaranty Corporation insurance to safeguard benefits. Third, 
limit preretirement cash outs that reduce retirement savings. 
To varying degrees, these provisions are included in the 
administration's SMART proposal. The Center also strongly 
supports the adoption of a modified version of SAFE, but we 
don't think it should be the exclusive proposal. We urge the 
Subcommittee to explore the pension bill of Senators Jeffords 
and Bingaman, Congresswoman Barbara Kennelly's legislation 
protecting women and the Pension Counseling Assisting Act 
introduced by Congressman Charles Schumer.
    Thank you for the opportunity to testify. I'd be happy to 
answer any questions.
    [The prepared statement follows:]

Statement of Gregory Moore, Deputy Director, Pension Rights Center












      

                                


    Mr. Portman. Thank you, Mr. Moore.
    Mr. Leonard.

   STATEMENT OF JAMES V. LEONARD, VICE CHAIRMAN, ENGINEERING 
  EMPLOYMENT BENEFITS COMMITTEE, INSTITUTE OF ELECTRICAL AND 
      ELECTRONICS ENGINEERS, INC.-UNITED STATES OF AMERICA

    Mr. Leonard. Good afternoon, Members of the Oversight 
Subcommittee. I'm James V. Leonard from St. Charles, Missouri, 
and I'm testifying here today as vice chair of the Engineering 
Employment Benefits Committee of the Institute of Electrical 
and Electronics Engineers/USA, IEEE-USA. I want to thank the 
Chair and Members of the Subcommittee for holding public 
hearings on these critically important issues.
    The IEEE is a transnational, technical, professional 
society whose membership currently includes more than 320,000 
electrical, electronics and computer engineers throughout the 
world. Of those, 219,000 reside in the United States. Of IEEE's 
employed U.S. members, nearly 70 percent work for private 
businesses. Of those in the private sector, 80 percent are 
employed by midsize and large companies and 20 percent by small 
businesses--and that's up from 10 percent in 1989.
    We have been looking into and working with legislative 
efforts in the pension area since the enactment of ERISA in 
1974. Over the years, IEEE-USA has worked in concert with 17 
other engineering organizations under the auspices of the 
American Association of Engineering Societies in support of 
major pension reform and retirement savings proposals. We have 
spearheaded efforts to organize a broad-based pension 
portability coalition to educate the members of participating 
organizations, Congress and the public about needed and 
proposed improvements and affordability of pension benefits. 
These problems must be fixed before the baby boom generation 
begins to retire early in the next century. Legislation has 
been introduced in both Houses of Congress that we think will 
help expand pension coverage in the rapidly growing small 
business sector and at the same time offer promising solutions 
to the vesting, affordability, retirement preservation, minimum 
benefit standards and administrative complexity problems that 
IEEE members are concerned about.
    The SAFE Act. The purpose of the SAFE plan act, as 
introduced last year by Representatives Nancy Johnson, Earl 
Pomeroy, and Harris Falwell is to encourage small businesses 
who establish simple secure pension plans for their employees. 
SAFE incorporates some of the best features from defined 
contribution pension plans like the highly respected TIAA-CREF 
and for more traditional defined benefit plans. the result is a 
prototype defined benefit plan that, unlike most others, is 
fully portable.
    The SAFE proposal facilitates pension portability. SAFE 
protects the real value--that is the purchasing power of earned 
benefits. SAFE also insures preserved preservation of benefits 
for use in retirement. In addition, the SAFE proposal includes 
provisions permitting the accumulation of up to 10 years of 
past service credits and simplified reporting and 
administrative requirements that should make it a particularly 
attractive benefit option for small business.
    The President's Plan. As part of the fiscal year 1999 
budget, the Clinton administration has proposed some pension 
reforms of its own. The President's 1998 pension package also 
includes a new a prototype defined benefit plan for small 
employers. With a few important exceptions, the President's new 
secure money, annuity or retirement trust--or SMART plan--bears 
a striking resemblance to the SAFE plan. Like SAFE, the SMART 
plan will permit small businesses to set up new, simplified 
tax-favored retirement account that combines the best features 
of defined benefits and defined contributions plans. In 
addition, the minimum benefit under SMART trust option would be 
guaranteed by the PBGC. The PBGC insurance feature should help 
to enhance the attractiveness of SMART to some employers 
provided the required premiums are set and kept at the low 
amount specified earlier of $5.00.
    A major concern of IEEE-USA and for many other 
organizations representing individuals who are maybe or work 
for professional service providers are those provisions that 
could specifically exclude employers from eligibility to 
participate in a SMART plan. To us it makes no sense for the 
administration to propose a pension coverage expansion proposal 
that will deprive a growing part of the small business 
community of an opportunity to participate in such an important 
retirement savings plan.
    And I will say in conclusion, the IEEE-USA urges the 
Oversight Subcommittee to favorably support the SAFE Act and 
report it to the Full Committee on Ways and Means and to 
recommend that the bill in its present or amended form move 
forward expeditiously for a vote in the House and Senate. I 
also request that the attached comments and recommendations on 
SAFE prepared by Thomas C. Woodruff, a resident of Norwalk, 
Connecticut be included in the records for these hearings.
    Thank you for your attention and I'll be pleased to answer 
any questions later on.
    [The prepared statement and attachments follow:]

Statement of James V. Leonard, Vice Chairman, Engineering Employment 
Benefits Committee, Institute of Electrical and Electronics Engineers, 
Inc.-United States of America

                            1. Introduction

    Good Afternoon, Madam Chairman and members of the Oversight 
Subcommittee. I am James V. Leonard from St. Charles, MO. I am 
testifying here today as the Vice Chairman of the Engineering 
Employment Benefits Committee of the Institute of Electrical 
and Electronics Engineers--United States of America (IEEE-USA), 
one of the world's largest professional societies. I hold 
bachelor's, masters and honorary professional degrees in 
electrical engineering from the University of Akron, Washington 
University of St. Louis and the University of Missouri at Rolla 
and have worked as an engineer for a major aerospace and 
defense company for 35 years.
    The views expressed in my testimony are those of IEEE-USA 
and are not those of my employer.
    On behalf of the professional society that I represent, I 
want to thank the Chair and the members of the Subcommittee for 
holding public hearings on such critically important issues as 
the current availability of pensions to American workers, 
incentives for and obstacles to expansion of the nation's 
voluntary private pension system, especially among small 
businesses, and the financial status of defined benefit plans 
monitored by the Pension Benefit Guaranty Corporation (PBGC).

2. IEEE-USA's Interest in Pension Benefits Expansion and Simplification 
                                 Issues

    The Institute of Electrical and Electronics Engineers is a 
transnational technical and professional society whose 
membership currently includes more than 320,000 electrical, 
electronics and computer engineers in 147 countries throughout 
the world. IEEE-USA promotes the technology policy and 
professional careers interests of the 219,000 IEEE members who 
live and work in the United States.
    Of IEEE's employed U.S. members, nearly 70 percent work for 
private businesses; 10 percent work for Federal, state or local 
government agencies; 10 percent are deans, professors or 
instructors at post-secondary educational institutions or work 
for non-profit research centers. The remainder are self-
employed and provide consulting services to businesses and 
government.
    Of those in the private sector, 80 percent are employed by 
mid-sized and large companies.Twenty percent work for small 
businesses, up from less than 10 percent in 1989.
    Although most of our members work for employers that offer 
tax-qualified pension plans and other retirement savings 
programs, long-standing concerns about problems that limit the 
effectiveness of the nation's voluntary private pension system 
and the extent to which it discriminates against mobile workers 
have prompted IEEE-USA to take an active part in legislative 
efforts to improve the system since the enactment of ERISA in 
1974.
    Over the years IEEE-USA has worked in concert with 17 other 
engineering organizations under the auspices of the American 
Association of Engineering Societies in support of major 
pension reform and retirement saving proposals. More recently, 
we have spearheaded efforts to organize a broad-based pension 
portability coalition to educate the members of participating 
organizations, Congress and the public about needed and 
proposed improvements in the portability of pension benefits 
for mid-career workers. A copy of the Coalition's vision, 
mission and goals is included as an attachment to our 
statement.
    Pension problems that remain unresolved include: limited 
coverage, particularly among small businesses; eligibility and 
vesting standards that penalize mobile workers; impediments to 
the portability of benefits, especially from defined benefit 
plans; the propensity of plan participants to spend rather than 
save pre-retirement distributions; the absence of minimum 
contribution requirements needed to ensure that retirees 
receive adequate benefits; and complex rules and regulations 
that make it too costly for many employers--especially small 
employers--to establish and administer pension plans for their 
employees.
    Because employer-sponsored pensions are such an important 
supplement to Social Security benefits and personal savings--
especially for lower and middle income Americans--these 
problems must be fixed before the baby-boom generation begins 
to retire early in the next century. And to the extent that 
employer-sponsored pensions are such an important source of the 
savings needed for productive investment in the nation's 
economy, expanded coverage will also help to improve America's 
technological competitiveness and its living standards.
    Fortunately, legislation has been introduced in both houses 
of Congress that we think will help to expand pension coverage 
in the rapidly growing, small business sector and, at the same 
time, offer promising solutions to the vesting, portability, 
retirement asset preservation, minimum benefits standards and 
administrative complexity problems that IEEE-USA members are 
concerned about.
    Among the most innovative of these legislative proposals is 
the SAFE Plan Act.

     3. The Secure Assets for Employees (SAFE) Plan Act (H.R. 1656)

    The purpose of the SAFE Plan Act--as introduced last year 
by Representatives Nancy Johnson (R-CT), Earl Pomeroy (D-ND) 
and Harris Fawell (R-IL) and included in two important pension 
reform proposals in the Senate (the Retirement Income and 
Savings Act--S. 883 and the Retirement Security for the 21st 
Century Act--S. 889)--is to encourage small businesses to 
establish simple, secure pension plans for their employees.
    SAFE incorporates some of the best features from defined 
contribution pension plans like the highly respected TIAA-CREF 
and from more traditional defined benefit plans. The result is 
a prototype defined benefit plan that, unlike most others, is 
fully portable. Here's how it works:
    A qualifying employer (with up to 100 employees) can 
establish a plan in the form of an annuity or as a trust. All 
employees who received at least $5,000 in compensation from the 
employer during any two, consecutive preceding years and at 
least $5,000 in the current year are eligible to participate. 
The employer can contribute an amount equal to 1%, 2% or 3% of 
each eligible employee's annual compensation to the annuity or 
the trust. And once these contributions have been made, each 
employee's benefit is fully and immediately vested.
    The SAFE proposal facilitates pension portability (benefit 
transferability) by permitting terminating plan participants 
to: 1) use the assets held in a SAFE trust to purchase a SAFE 
annuity that will pay the promised benefit at retirement; 2) to 
make a direct trustee to trustee transfer to a subsequent 
employer's plan; or to transfer the present value of their SAFE 
assets into a rollover IRA.
    SAFE protects the real value (purchasing power) of earned 
benefits by funding employer and employee contributions based 
on present year salaries and by providing an opportunity for an 
enhanced benefit if the SAFE annuity or trust earns more than 
5% in any given year.
    SAFE also ensures preservation of benefits for use in 
retirement by providing for a direct transfer of SAFE assets to 
an annuity or to a rollover IRA should participants change or 
lose their jobs.
    In addition, the SAFE proposal includes provisions 
permitting the accumulation of up to ten years of past service 
credits and simplified reporting and administrative 
requirements that should make it a particularly attractive 
benefit option for small businesses.

         4. President Clinton's Small Business Pension Proposal

    As part of the Fiscal Year 1999 Budget, the Clinton 
Administration has proposed some pension reforms of its own. In 
addition to a modest start-up tax credit designed to expand 
coverage by encouraging small businesses to establish some form 
of pension plan (a Simple IRA, Simple 401(k) or Simplified 
Employee Pension) for their employees and a new salary-
reduction IRA, the President's ``1998 Pension Package'' also 
includes a new protype defined benefit plan for small 
employers. With a few important exceptions, the President's new 
Secure Money Annuity or Retirement Trust (SMART) plan bears a 
striking resemblance to the SAFE Plan.
    Like SAFE, the SMART plan will permit small businesses 
(with up to 100 employees) to set up a new, simplified tax-
favored retirement account that combines the best features of 
defined benefit and defined contribution plans. As its title 
suggests, the President's Plan also offers annuity and trust 
options. SMART also allows employer contributions ranging from 
1% to 3% of each employee's compensation; provides for full and 
immediate vesting of benefits; guarantees a fully funded 
minimum defined benefit with the possibility of a greater 
benefit if investment returns exceed 5%; facilitates 
portability and retirement asset preservation through the 
purchase of annuities or direct transfers to an IRA or another 
employer's plan; and simplifies plan administration and 
reporting requirements.
    In addition, the minimum benefit under the SMART trust 
option would be guaranteed by the Pension Benefit Guaranty 
Corporation, subject to payment by plan sponsors of a reduced 
premium. This PBGC insurance feature should help to enhance the 
attractiveness of SMART to some employers, provided the 
required premiums are set and kept at low single digit levels.
    Unlike SAFE, however, the President's proposal does not 
provide for past service credits.This omission is likely to 
make SMART less attractive than SAFE to many small business 
owners.
    A major concern for IEEE-USA and for many other 
organizations representing individuals who may be, or work for, 
professional service providers are those provisions that would 
specifically exclude such employers from eligibility to 
participate in a SMART plan. In dynamic and rapidly changing 
American labor markets, especially in the high technology 
sector, more and more professionals--including engineers--are 
establishing small businesses or providing professional 
services as the employees of small businesses. To us, it makes 
no sense for the Administration to propose a pension coverage 
expansion proposal that will deprive a growing part of the 
small business community of an opportunity to participate in 
such an important retirement savings plan.
    In our opinion, the proper way to address concerns about 
revenue losses and/or potential abuses by some highly 
compensated individuals, is to establish a cap on the 
compensation that is taken into account for benefits purposes--
not by excluding certain classes or groups of workers based 
solely on the way they are organized or the nature of the 
services they provide.
    In this regard, the SAFE proposal limits the maximum 
compensation to be taken into account in determinining tax-
favored benefits at $165,000. The SMART plan sets a limit of 
$100,000.
    Even though very few of our members would be adversely 
affected by the lower compensation limit, we are concerned that 
a $100,000 unindexed cap may be a deterrent to participation by 
many small business owners, thereby unnecessarily limiting the 
effectiveness of SMART as an incentive for expanding pension 
coverage for their employees.
    In conclusion, IEEE-USA urges the Oversight Subcommitte to 
favorably report the Secure Assets for Employees (SAFE) Plan 
Act to the full Committee on Ways and Means and to recommend 
that the bill, in its present (or an amended form including 
appropriate spousal protections), be moved forward 
expeditiously for a vote in the House and the Senate.
    I have also requested that the attached comments and 
recommendations on SAFE--prepared by Thomas C. Woodruff, a 
nationally recognized expert on pensions and retirement savings 
issues--be included in the record of these hearings.
    IEEE-USA and other organizations in the American 
Association of Engineering Societies and the Pension 
Portability Coalition will do our part to enlist additional 
cosponsors and build the grass roots support that will be 
needed to enact this important legislation in the 105th 
Congress.
    Thank you for your attention. I'll be pleased to try to 
answer any questions that you may have.
      

                                


      

Pension Portability Coalition--``You Can Take It With You''

                            Vision Statement

    The Pension Portability Coalition envisions that by the 
Year 2000, portability will be a reality.

Pension portability means:

     Pension Benefit Transferability
    The ability to transfer pension assets or service credits 
from one plan to another
     Benefit Value Protection
     To minimize the impact of inflation on the 
purchasing power of pension benefits
     Retirement Asset Preservation
    To encourage individuals to save rather than spend 
preretirement pension distributions

                           Mission Statement

    In order to increase the productivity and retirement income 
security of American workers, the mission of the Pension 
Portability Coalition is to Support Enactment of Pension 
Portability Improvement Legislation

                                 Goals

    To educate the members of participating organizations about 
needed and proposed improvements in pension portability,
    To identify and evaluate pension portability improvement 
options, including legislative and non-legislative 
alternatives, and
    To inform concerned organizations, through Congressional, 
industry and public relations, of its evaluations in order to 
influence and provide a focus for improvements in pension 
portability.
      

                                


Remarks on Oversight of Pensions Including Plan Availability, Coverage 
Expansion and Related Issues

                      By Thomas C. Woodruff, Ph.D.

                          Introductory Remarks

    My name is Thomas Woodruff. For the past twenty-four years, 
I have worked in the private sector, the federal government, 
and academia on personal finance and retirement planning 
issues. From 1978 to 1981, I was the Executive Director of the 
President's Commission on Pension Policy. That Commission found 
serious gaps in pension plan participation in the U.S. 
workforce, particularly those working for small businesses, and 
called for sweeping changes in our public policy toward our 
public and private pension systems. After working as a Visiting 
Professor at Cornell University, I directed a foundation-
sponsored blue-ribbon panel called the Commission on College 
Retirement. The Commission on College Retirement's work lead to 
an overhaul of TIAA-CREF, the nation's largest network of 
portable pension plans. In my current capacity as a small 
business owner, I write extensively about personal finance and 
retirement planning issues, and provide consulting services to 
financial services companies and membership organizations such 
as the Institute of Electrical and Electronic Engineers--United 
States of America (IEEE-USA).

             Pension Plan Participation In Small Businesses

    First, I would like to say that I concur completely with 
the testimony delivered today by the IEEE-USA. I will not 
repeat the points made in that testimony. I would like to say 
that the SAFE Plan Act's sponsors, Representatives Nancy 
Johnson, from my state of Connecticut, Earl Pomeroy , and 
Harris Fawell are to be commended for introducing this 
thoughtful and important piece of legislation.
    I have just two points to make regarding public policy 
toward small business pension plans and the SAFE Plan Act. 
First, I believe that continuation of current policy will lead 
to the ongoing disenfranchisement of small business employees 
from both the tax benefits and retirement income security that 
they derive from private pension plans. And, second, I believe 
that a minor improvement to the SAFE Plan Act could have a 
major positive impact on the retirement income security of 
those who would participate in SAFE plans in the future.

 Federal Policy Toward Small Business Pension Plans Continues to be a 
                                Failure

    In its final report to Congress and the President in 1981, 
the President's Commission on Pension Policy concluded: `` The 
most serious problem facing our retirement system today is the 
lack of pension coverage among private sector workers.'' The 
Commission also said that the ``lack of pension plan offerings 
in small businesses is a major reason why pension plan growth 
is expected to continue to stagnate.''
    Among other reasons, the Commission cited the 
administrative expenses of actuarial, accounting, insurance and 
investment services necessary to operate small plans, 
particularly defined benefit pension plans as a problem that 
needed to be solved. In addition, the Commission found that 
eligibility and vesting requirements in traditional defined 
benefit plans are just not well suited for small businesses due 
to employee turnover as well as the uncertain life expectancy 
of many of these enterprises.
    Unfortunately, in the seventeen years since the President's 
Commission on Pension Policy issued its report, the low level 
of pension plan participation among employees of small 
businesses has remained virtually stagnant.
    The SAFE Plan Act goes a long way toward addressing the 
administrative and plan design problems faced by small business 
pension plans. While I would not expect that passage of the 
SAFE Plan Act would lead to pension plan coverage among small 
businesses to approach the levels found in large businesses 
today, enactment of the SAFE Plan Act would help remove a few 
unnecessary barriers to pension plan formation and maintenance.

                  The SAFE Plan Act Could be Improved

    Among the most important problems that we face in designing 
pension plans is how to retain the purchasing power of pension 
benefits as they are earned during the working years and when 
they are received during retirement.
    In its Trust form, the SAFE Plan Act does provide that 
employees would benefit from earnings in the Trust above the 
assumed interest rate used for funding the Trust. This would 
provide the opportunity for them to begin retirement with 
either an annuity or an income stream with purchasing power 
sufficient to maintain their standard of living. However, no 
provision is made for similar participation in earnings or 
dividends with the SAFE Annuity form. In addition, the Act 
seems to presume that the annuities that would be purchased by 
the plan or by individuals at retirement would be fixed 
annuities.
    One of the lessons that I learned when I was President of 
the Commission on College Retirement was the importance of the 
``participating'' and ``variable'' forms of annuities. The 
TIAA-CREF pension plans have historically been funded with 
participating and variable annuities both as accumulating and 
pay-out annuities.
    TIAA is essentially a large portfolio of fixed-income 
investments that promises to its participant/investors a 
guarantee of principal plus a minimum rate of return. Any 
earnings above the minimum guarantee are paid to participant/
investors as dividends. This is true both while the 
participants are working and when they choose to annuitize the 
accumulated funds.
    CREF was established in 1952 as a variable annuity with a 
diversified portfolio of stocks as its underlying investment. 
Since 1989, CREF has diversified to include a money market 
fund, and a variety of stock and bond portfolios. Unlike TIAA, 
CREF does not guarantee a minimum rate of return. During the 
accumulation period, however, participants do receive the full 
benefit of the earnings in the underlying assets, much like 
participants in 401(k) plans. At retirement, participants also 
have the option of converting their CREF accumulations into a 
variable pay-out annuity. Initial payments begin using a 4% 
assumed interest rate and adjustments are made periodically, up 
or down, based on whether the investment returns reach or 
exceed the 4% target.
    TIAA and CREF annuities have served higher education and 
the non-profit community very well. The TIAA-CREF approach 
toward participating and variable annuities provides one 
example of how these annuity forms can help preserve the 
purchasing power of retirement benefits for workers. A 
modification of the SAFE Plan Act to include participating and 
variable annuities both in the SAFE Annuity form for active 
employees and for deferred and pay-out annuities for terminated 
employees and retirees would greatly enhance the benefits that 
could be paid by these plans without increasing their cost to 
employers.
      

                                


    Mrs. Johnson of Connecticut. Thank you.
    Ms. Shaffer.

STATEMENT OF GAIL S. SHAFFER, EXECUTIVE DIRECTOR, BUSINESS AND 
                     PROFESSIONAL WOMEN/USA

    Ms. Shaffer. Thank you, Madam Chair and distinguished 
Members of the Subcommittee. We very much appreciate your 
allowing us this opportunity to testify today.
    I'm Gail Shaffer, executive director of Business and 
Professional Women/USA, BPW/USA. We're an organization 
representing 70,000 working women across the country. A third 
of our members are businessowners. Our members are involved in 
more than 2,000 local chapters nationwide--at least one in 
almost every congressional district in the nation.
    We applaud your Subcommittee for focusing on the status of 
our Nation's pension system and allowing us to bring to your 
attention the particular ways in which the system's current 
inadequacies disproportionately affect women in an adverse way. 
For working women retiring, they come against a reality that 
might be characterized as the ``showdown at gender gap.'' There 
is already a 26-cent gender gap in the average American wage 
scale and that is compounded in retirement and translates into 
a 50 percent retirement gap. Obviously, this raises major 
equity issues and BPW has had a longstanding interest in this 
issue. We have been working not only to effect change on 
Capitol Hill, but also to educate our members on the importance 
of retirement planning.
    I'm very glad that Congressman Portman cited the 
publication in Good Housekeeping magazine which hits the stand 
today. We will be helping to distribute that, but it was really 
a project sponsored by the Teresa and John Heinz III Foundation 
and the Women's Institute for a Secure Retirement--also known 
as WISER--which has been a partner to BPW as we work on these 
issues.
    BPW was also a lead organization behind the passage in 1984 
of the Retirement Equity Act which was a critical first step in 
addressing some of the difficulties women have faced in gaining 
greater access to pension benefits, particularly as spouses and 
widows. Since that Act was passed, there has been modest 
improvement in the rate of pension coverage for women which is 
certainly a welcome development. However, that progress has 
been undermined by ongoing structural barriers and also by the 
overall shift away from defined benefit or basic pension plans 
to do-it-yourself defined contribution plans. This plan will 
leave women more financially vulnerable at retirement.
    Several factors contribute to the fact that women are 
especially vulnerable to economic insecurity in old age. The 
first is lifespan. Although longevity is certainly generally 
considered to be a blessing, when it comes to retirement 
security the fact that women live longer on the average than 
men becomes a disadvantage. Unless women begin retirement with 
a bigger nest egg and a larger pension--which is rarely the 
case, the march of time and the pressures of inflation will 
combine to make their later years--at best--uncomfortable and 
at worst--poverty stricken. Financial experts tell Americans to 
plan to replace 70 to 80 percent of their income at retirement. 
Unfortunately, that advice does not work for women who are 
likely to need more than 100 percent of their preretirement 
income in order to maintain that security through a longer 
lifespan.
    Second, marital status is an important factor. Being single 
in old age is somewhat financially risky, but for women it is 
much more so. Consider that in 1992 only 6 percent of married 
women over age 65 fell below the poverty line; but well over 20 
percent of single women fit the government's definition of 
poverty. About 21 percent of women who were either widowed or 
never married were poor; while the percentage of divorced women 
in poverty climbed to 29 percent. It is important to keep in 
mind that as these women grow older--as they reach, say 75 or 
85--that poverty rate climbs, as well.
    Living alone is another factor. Three-quarters of men, age 
65 and older, live with a spouse; while only one-third of women 
do. A single elderly woman is twice as likely as an elderly man 
to be poor. Furthermore, the Nation's pension system is 
reflecting a work pattern that does not reflect the reality of 
women's working lives. Women over 25 tend to stay in jobs a 
shorter period of time and leave the work force for care giving 
responsibilities, for example. Women also are much less likely 
to have a pension and when they do, they are concentrated more 
in low-wage service part-time jobs and also more likely to work 
for a smaller business. So a majority still are not covered by 
any pension at all.
    The type of pension offered also makes a big difference. We 
recognize it is challenging to create the kind of ideal system 
we are all looking for. But we are very concerned about the 
marked shift from defined benefit plans toward defined 
contribution plans because it disproportionately hurts women. 
As I mentioned, women earn on average less than three-quarters 
of what men earn. The gender gap in wages means they have 
substantially less income available to put in an IRA or 401(k) 
plan. Three out of four working women earn less than $23,000 
annually. Only 10 percent of them earn over $45,000 annually.
    Second, studies have shown that women's savings priorities 
are focused on their children's education, rather than 
retirement.
    Third, they move in and out of the work force and from one 
job to another more frequently and the lack of pension 
portability is a very significant problem for them. And again, 
because their priorities focus on things such as education and 
medical emergencies, they are much more likely to cash out 
their accumulations, rather than keep those funds in the 
retirement account.
    And finally, given the fact that women generally have 
smaller amounts in their 401(k) account, they tend to be much 
more risk averse in their investment approach. Consider that 
over age 40, the average woman has accumulated only $7,000 in 
her 401(k), whereas the average man has accumulated $20,000 in 
his. That makes the investment choices different and certainly 
the wage gap and other factors have contributed to a less 
desirable set of options.
    For all of these reasons, a defined contribution plan may 
not always be the best option for women who might, in fact, be 
better served by the features in the defined benefit plan that 
guarantees a certain minimum benefit; that does not place all 
the burden on the employee; and is guaranteed to be paid out in 
monthly installments over the remainder of one's life.
    To be fair, defined benefit plans do not solve all of the 
problems that women face in retirement planning--the wage gap, 
the career interruption, stringent investment requirements 
still tend to depress the size of those pensions for women as 
compared to men. And over the long term, inflation will 
certainly erode the value of the benefit. But the annuitized 
format of these plans and their reliability and the 
participation of employers are features that are certainly 
important to women as current and future retirees.
    Unfortunately, as everyone knows, small businesses 
particularly, need plans that have a minimum of complexity and 
are affordable. And as I said, one-third of our members are 
small business owners and this is something we are very 
concerned with. That's why we are so pleased that Congresswoman 
Johnson, you and your colleague, Congressman Pomeroy and others 
have introduced H.R. 1656, the SAFE plan, to offer real 
pensions to workers that will guarantee a minimum defined 
benefit and introduce portability and other features that will 
be helpful. There are also important safeguards that we applaud 
in the bill that we feel will benefit both the small business 
owner and the retiree.
    Businesses feel that it's truly helpful to small business 
owners when they are spared much of the administrative burden 
and complexity associated with more traditional qualified 
retirement plans. It is also designed, as others have said, to 
complement the SIMPLE plan, which many small businesses have 
begun to offer. We are very pleased there is bipartisan support 
for this plan. Our membership organization is a nonpartisan 
organization and we feel that it is truly a very fine answer to 
a complicated problem.
    We would also like to mention our support for another bill 
that addresses problems for women achieving retirement equity--
and that is the Comprehensive Women's Pension Protection Act--
H.R. 766 and S. 320--which Congresswoman Kennelly has supported 
along with Senator Carol Moseley-Braun. This is also important, 
to address systemic barriers for women because it addresses 
specific gender inequities within current law. For example, it 
provides for automatic division of pension benefits in a 
divorce and also improves spousal consent provisions for 
401(k)s.
    We would be glad to comment further as the bills evolves in 
the Congress. We very much appreciate this opportunity today 
and particularly the focus that this Subcommittee has put on a 
very important issue to small business owners and to women 
facing retirement.
    [The prepared statement follows:]

Statement of Gail S. Shaffer, Executive Director, Business and 
Professional Women/USA

    Good afternoon. I want to thank the members of the 
Subcommittee and particularly Congresswoman Johnson for 
inviting me today. I am Gail Shaffer, Executive Director of 
Business and Professional Women/USA, an organization 
representing 70,000 working women across the country, a third 
of whom are business owners. Our members are involved in more 
than 2,000 local chapters nationwide--at least one in nearly 
every congressional district in the nation.
    We applaud this committee for focusing on the status of our 
nation's pension system, and for allowing us to bring to your 
attention the ways in which the system's current inadequacies 
disproportionately affect women. BPW has had a long-standing 
interest in this issue, and we are working not only to effect 
change on Capitol Hill, but also to educate our own members on 
the importance of retirement planning. In this regard, it just 
so happens that the April issue of Good Housekeeping Magazine, 
which hits the stands today, includes a guide for women on 
retirement planning sponsored by the Theresa and H. John Heinz, 
III Foundation and the Women's Institute for a Secure 
Retirement--also known as WISER. BPW is working in partnership 
with WISER and will be helping to disseminate thousands of 
these guides across the country.
    BPW was also a lead organization behind the passage of the 
Retirement Equity Act of 1984, which was a critical first step 
in addressing some of the difficulties women faced in gaining 
greater access to pension benefits, particularly as spouses and 
widows.
    Since the REA was passed, there has been some modest 
improvement in the rate of pension coverage for women, which is 
certainly a welcome development. However, that progress has 
been undermined by ongoing structural barriers and by the 
overall shift away from defined benefit, or ``basic pension'' 
plans to do-it-yourself, defined contribution plans. This trend 
will leave women more financially vulnerable at retirement.
    Several factors contribute to the fact that women are 
especially vulnerable to economic insecurity in old age. The 
first is lifespan. Although longevity is generally considered 
to be a blessing, when it comes to retirement security, the 
fact that women live longer than men is a disadvantage. Unless 
women begin retirement with a bigger nest egg and a larger 
pension--which is rarely the case--the march of time and the 
pressures of inflation will combine to make their later years 
at best uncomfortable and at worst poverty-stricken. Financial 
experts tell Americans generally to plan to replace 70 or 80 
percent of their income at retirement. Unfortunately, this 
advice doesn't work for women, who are likely to need more than 
100 percent of their pre-retirement income in order to remain 
secure throughout their longer lives.
    Marital status is another important factor. Being single in 
old age is somewhat financially risky, but for women it is 
substantially more so. Consider that in 1992, only six percent 
of married women over age 65 fell below the poverty line. But 
well over 20 percent of single women fit the government's 
definition of poverty. About 21 percent of women who were 
either widowed or never married were poor, while the percentage 
of divorced women in poverty climbs to 29 percent. And it is 
important to keep in mind that as women grow older, as they 
reach 75 or 85 or older, their poverty rate also climbs.
    Living alone is another predictor of elderly poverty and 
women are much more likely than men to live alone. Three-
quarters of men age 65 and older live with their spouse but 
only one-third of women do. A single elderly woman is twice as 
likely as an elderly man to be poor. It is also important to 
note that our nation's poverty rate for single elderly women, 
which stands at about 18 percent, is by far the highest 
percentage in the industrialized world. And the breakdown of 
poverty rates among minority groups is even more stark.
    Although the nation's pension system is gender-neutral, it 
was set up to reward a work pattern that does not reflect the 
reality of women's working lives. For example, women over 25 
tend to stay in jobs an average of only 4.7 years, whereas 
pension vesting rules generally require five years on the job. 
Women are much more likely to leave the workforce and three 
times as likely to work part-time to accommodate care-giving 
responsibilities. Women also earn less than men--an average of 
26 percent less. The result of lower earnings means that 
women's pension benefits will be lower than those of men.
    But most women aren't lucky enough even to have a pension, 
regardless of its size. Women are more likely to be working in 
low-wage, service, part-time jobs and/or to work for small 
businesses--where pension coverage is the most sparse. Although 
about 48 percent of full-time female workers have some form of 
pension coverage, a majority still do not. And only 39 percent 
of all female workers are covered.
    The type of pension plan that is offered also makes a big 
difference. We recognize that it is challenging to create a 
system that covers as many workers as possible, and that access 
to defined contribution plans is certainly better than no 
retirement savings vehicle at all. But we are very concerned 
about the marked shift among employers away from defined 
benefit plans toward defined contribution plans. This trend 
disproportionately hurts women, for a few reasons.
    First, women earn, on average, less than three-quarters of 
what men earn, and so they have substantially less income 
available to put in an IRA or a 401(k) plan. Three out of four 
working women earn less than $23,000 annually. Even a 
disciplined saver will have trouble accumulating much in 
savings at that level. Second, studies have shown that women's 
savings priorities are often focused on their children's 
education and not on retirement. Third, with women moving in 
and out of the workforce and from one job to another more 
frequently than their male counterparts, the problems 
associated with lack of portability become particularly acute 
for them. And again, because of priorities such as their 
children's education and medical emergencies, women often opt 
to cash out their 401(k) accumulations when they leave a job 
rather than keep the funds for retirement.
    Finally, given the fact that women generally have smaller 
amounts saved in their 401(k) accounts and have less to fall 
back on from other sources, it is not surprising that they are 
often more averse to riskier, albeit higher yield, investments. 
It is not simply a lack of financial sophistication, it is 
actually a pretty rational behavior. Consider that over age 40, 
the average woman has accumulated only $7,000 in her 401(k) 
whereas the average man has accumulated $20,000 in his. This is 
already an exponential disparity which is further amplified as 
the effects of the wage gap, compound interest and investment 
choices take their toll over time.
    It must also be said that even in best-case scenarios, 
where women have saved much, invested well, and have a sizable 
lump sum distribution available to them when they retire, it is 
still incumbent on them to manage these assets so that they 
will provide income for the remainder of their lives. If the 
market hits a prolonged slump, if they make poor investment 
decisions or fall prey to unscrupulous financial advisors, they 
could easily exhaust their assets late in life. And once the 
money is gone, it is gone.
    For all of the reasons outlined above, defined contribution 
plans may not always be the best option for women, who might in 
fact be better served by the features available in a defined 
benefit plan--what we think of when we think of a traditional 
pension.
    A defined benefit plan has a lot going for it as far as 
women are concerned. First, it does not place all of the burden 
on the employee to plan and execute her retirement savings all 
by herself. It features a contribution by the employer. It is 
less voluntary in nature and is a form of forced savings. It is 
also guaranteed to be paid out in monthly installments over the 
remainder of one's life, thus recipients are much less prone to 
the potential catastrophes of poor asset management.
    To be fair, defined benefit plans do not solve all of the 
problems women face in retirement planning. The wage gap, 
career interruptions and stringent vesting requirements still 
tend to depress the size of women's pensions as compared to 
men. And over the long term, inflation will gradually erode the 
value of the monthly benefit. But the annuitized format of 
these plans, their reliability, and the participation of 
employers are all features that are particularly important to 
women both as current and future retirees.
    Unfortunately, as everyone in this room knows, the cost and 
complexity of defined benefit plans has made them a difficult 
option for small businesses to pursue. The statistics bear this 
out: only about 24 percent of firms with fewer than 100 
employees, and 13 percent of firms with 10 or fewer employees, 
offer such plans. Given that small businesses are creating the 
majority of the jobs in this country, it is clear that we ought 
to make it easier for these firms to offer defined benefit 
plans.
    That is why we are so very pleased that Congresswoman Nancy 
Johnson, along with her colleague, Congressman Earl Pomeroy, 
has decided to address this problem and introduce H.R. 1656, 
the Secure Assets For Employees Plan Act of 1997. The SAFE plan 
provides a framework to enable smaller employers to offer real 
pensions to their workers. The bill guarantees a minimum 
defined benefit, which as I have stated is so critical for 
women. It also introduces portability to these benefits, so 
that when an employee leaves her job, she can take her 
retirement savings with her.
    There are also important safeguards written into this bill. 
It requires that the SAFE plans be fully funded and that the 
actuarial assumptions be conservative, so that a minimum 
guaranteed benefit can be achieved. If the plan exceeds 
conservative expectations, the beneficiary receives higher 
distributions. Employees will be able to keep track of their 
assets and their future retirement benefits through an annual 
account statement. SAFE also ensures that employees' benefits 
are 100% vested at all times and that all plan participants are 
treated the same.
    This bill is also extremely attractive to small business 
owners, who are spared much of the administrative burden and 
complexity associated with traditional qualified retirement 
plans. SAFE is a much more affordable alternative to these 
plans, and it is designed to complement the SIMPLE plan, which 
many small businesses have begun to offer.
    We are optimistic about the prospects of passing the SAFE 
bill in the foreseeable future, because it enjoys bi-partisan 
support, and because the Clinton Administration has also 
indicated its support for this concept. We would like both 
Congress and the Administration to know that BPW/USA supports 
this legislation and would very much like to see it signed into 
law this year.
    We would also like to mention our support for another bill 
that addresses the problems women face in achieving retirement 
equity, and that is the Comprehensive Women's Pension 
Protection Act--H.R. 766 and S. 320. This bill was introduced 
in the Senate by Senator Carol Moseley-Braun and in the House 
by your colleague from Connecticut, Barbara Kennelly. The 
Senate version, S.320, has bi-partisan support, as Senator 
Olympia Snowe, with whom we have worked closely over the years, 
is a lead co-sponsor of the measure.
    The Comprehensive Women's Pension Protection Act is 
important because in addition to attempting to address systemic 
barriers for women, it also addresses specific gender 
inequities within current law. For example, it provides for the 
automatic division of pension benefits in a divorce unless 
otherwise specifically provided in the settlement. Current law 
allows for division of pension benefits, but the process is 
confusing and many women are not made aware of these rights 
until after a divorce is final, when it is too late. The bill 
also improves spousal consent protections for 401(k)'s so that 
they are on a par with those pertaining to defined benefit 
plans when it comes to lump sum distributions. It expands 
options for joint and survivor annuity benefits so that either 
surviving spouse will have a benefit equal to two-thirds of the 
benefit received while both were living, and requires that both 
spouses be fully informed of their options before a decision is 
made. Currently, survivor benefits are half of the previous 
benefits, which can be a significant financial burden for 
women, who are more likely to be the survivor and less likely 
to have other sources of income.
    I hope the members of this subcommittee will take a look at 
this legislation and consider lending their support to it as 
well. We believe that for anyone who is truly interested in 
improving gender equity and the economic status of older women, 
many of the provisions contained in this bill are must-see 
language.
    In closing, I would like to once again commend this 
Subcommittee for focusing attention on this critically 
important issue. The implications of inadequate pension 
coverage are far-reaching--indeed, inter-generational. If we 
address this issue now and take steps that will narrow the gap 
between those retirees who are financially and those who are 
poor, we will not only be making an investment in our citizens, 
but also ensure a much smaller tax burden in the future.
    Thank you for your kind attention to my remarks. I'd be 
pleased to take any questions you may have.
      

                                


    Mrs. Johnson of Connecticut. Thank you very much, Ms. 
Shaffer.
    Mr. Callahan, it's a pleasure to welcome you back to the 
Subcommittee from Cheshire, Connecticut but also someone who 
was very instrumental in helping this Subcommittee write the 
SIMPLE legislation about a year ago. Welcome.

    STATEMENT OF MICHAEL CALLAHAN, PRESIDENT, PENTEC, INC., 
CHESHIRE, CONNECTICUT; ON BEHALF OF AMERICAN SOCIETY OF PENSION 
                           ACTUARIES

    Mr. Callahan. Thank you. Good afternoon, Madam Chairwoman, 
and thank you for inviting the American Society of Pension 
Actuaries, ASPA, to testify before your Subcommittee on this 
important subject.
    My name is Michael Callahan and I'm an enrolled actuary and 
president of PenTec, Inc.--a pension and actuarial consulting 
firm located in Cheshire, Connecticut.
    PenTec provides services to retirement plans for over 500 
Connecticut-based companies. I'm also a past-president of the 
American Society of Pension Actuaries on whose behalf I am 
testifying today.
    ASPA is an organization of over 3,000 professionals who 
provide actuarial consulting services to approximately one-
third of the retirement plans in the United States. The vast 
majority of these plans are for small businesses.
    Ten years ago, 90 percent of the plans that my company, 
PenTec, administered were defined benefit plans. Due to 
extremely complicated laws and regulations, less than 10 
percent of the plans PenTec currently services are defined 
benefit plans. The same change in ratios are found throughout 
ASPA's membership. During this same period, funding of employee 
benefits had shifted from the employer to the employee as 
illustrated by the growth in the 401(k) plans.
    I congratulate the Chair and Congressman Pomeroy for 
introducing a simplified defined benefit plan that employers 
can use. The SAFE plan is the first congressional step since 
ERISA to establish a defined benefit pension program that is 
designed for small business employees. The SAFE plan is secure, 
fully portable and avoids most of the complex rules and 
regulations that choke small businesses that want to offer 
retirement plans for their employees. The unique feature of the 
SAFE plan is that in addition to a defined retirement benefit, 
it also gives employees the opportunity to obtain larger 
retirement benefits if plan assets perform better than 
conservative expectations. Further, the SAFE plan can provide 
employees with up to 10 years of credit for service prior to 
the start of the plan.
    This allows for small business employees, in effect, to 
catch up with respect to the retirement savings. This is 
important because typically a developing small business cannot 
afford a retirement plan for several years. The catchup 
provisions of the SAFE plan are critical to the retirement 
planning of longstanding employees who helped build that small 
business. By contrast, defined contribution plans, like the new 
SIMPLE plan, do not allow for such catching up. Further, we are 
very disappointed in the administration's SMART plan proposal 
because it does not allow for any prior service credit. The 
security of the plan to the employees cannot be understated 
either. Under the SAFE plan, the small business must always 
fully fund employees' benefits.
    Further, the SAFE plan proposal provides fully portable 
benefits, which is extremely important given today's mobile 
work force. Benefits are fully vested in automatic IRA 
conversions, plus high penalty taxes for early withdrawals 
increase incentives for employees to maintain their pension 
assets.
    I congratulate the Clinton administration for supporting 
expansion of small business defined benefit plans by including 
the SMART plan proposal in fiscal year 1999 budget. Although 
there are many similarities between SMART and SAFE, there are 
some important differences that I'd like to highlight.
    First, although SAFE requires no PBGC insurance, I do 
believe a modest PBGC premium could in fact enhance the 
marketability of the plan since it would give small business 
employees added security. However, such premiums should 
recognize the greatly reduced insurance risk to the PBGC and be 
substantially less than the PBGC current premium.
    ASPA also agrees with the PBGC testimony that the small 
business defined benefit plan should guarantee an annuity form 
of benefit if elected by the participant. However, given the 
difficulties small plan sponsors have when purchasing 
individual annuity contracts, ASPA strongly suggests that this 
Subcommittee consider the proposal described in ACLI's 
testimony to allow the sponsor of the SAFE plan to select from 
a range of interest rates from 3 to 5 percent upon adoption of 
the plan. This would allow the SAFE plan to be funded at levels 
that more closely resemble the individual annuity market.
    In addition, we would suggest that the PBGC be given 
authority to develop methods for small business owners to 
purchase individual annuities on a more competitive basis. For 
example, the PBGC could facilitate negotiating master contracts 
with insurance companies which could be used for small business 
owners sponsoring the SAFE plan. The annual limit on 
compensation that may be taken into account for benefit 
purposes under the SAFE plan is $160,000. The same limit in 
current law that applies to SIMPLE plans and all other 
qualified retirement plans should also apply to simplified 
defined benefit plans.
    Under the SMART plan, the proposed annual compensation on 
it is only $100,000. ASPA strongly believes that there is not 
justifiable policy reason for imposing a special lower 
compensation limit. Because it is a defined benefit plan, 
benefits provided to the rank and file workers under both the 
SAFE and the SMART plans are significant and substantially 
greater than that would be provided under the SIMPLE plan. The 
owners of small businesses need an incentive to provide these 
greater benefits to rank and file workers.
    I congratulate this Subcommittee's interest in retirement 
savings and thank you again for the opportunity to testify on 
this extremely important subject.
    [The prepared statement follows:]

Statement of Michael Callahan, President, PenTec, Inc., Cheshire, 
Connecticut; on Behalf of American Society of Pension Actuaries

                              Introduction

    Good afternoon. Thank you for inviting me today to testify 
on this important subject. My name is Mike Callahan. I am an 
enrolled actuary and president of PenTec, a pension consulting 
and actuarial firm located in Cheshire, Connecticut. PenTec 
provides retirement plan services to over 500 small businesses 
located in the state of Connecticut. I also am past president 
of the American Society of Pension Actuaries (ASPA) on behalf 
of whom I am testifying today. ASPA is an organization of over 
3,000 professionals who provide actuarial, consulting, and 
administrative services to approximately one-third of the 
qualified retirement plans in the United States. The vast 
majority of these retirement plans are plans maintained by 
small businesses, and today I would like to focus on the myriad 
of rules and regulations which continue to make it exceedingly 
difficult for small businesses to offer meaningful retirement 
plan coverage, particularly defined benefit plan coverage, to 
their employees.
    As part of the Small Business Job Protection Act of 1996, 
Congress passed a number of pension simplification provisions 
intended to promote coverage under qualified retirement plans. 
ASPA supported these initiatives and applauds the efforts of 
the members of this Committee in obtaining their passage. 
However, the enactment of these changes was only a first step. 
Since the enactment of the Employee Retirement Income Security 
Act of 1974 (ERISA), the Congress has enacted layer upon layer 
of complex laws, and the Internal Revenue Service (IRS) has 
issued layer upon layer of complicated regulations seriously 
retarding the ability of small business to maintain retirement 
plans for their employees. In most cases these rules were 
enacted not in the interest of promoting retirement savings, 
but to raise revenue and to fund unrelated initiatives.
    The effect of these costly rules and regulations on small 
business pension coverage is both dramatic and rather 
disturbing. The facts speak for themselves. According to a 1996 
General Accounting Office study,\1\ a whopping 87 percent of 
workers employed by small businesses with fewer than 20 
employees have absolutely no retirement plan coverage. It's 
only slightly better for workers at small businesses with 
between 20 and 100 employees, where 62 percent of the workers 
have no retirement coverage. By contrast, 72 percent of workers 
at larger firms (over 500 employees) have some form of 
retirement plan coverage.
---------------------------------------------------------------------------
    \1\ General Accounting Office, 401(k) Pension Plans--Many Take 
Advantage of Opportunity to Ensure Adequate Retirement Income Table 
II.3 (August 1996).
---------------------------------------------------------------------------
    This significant disparity is made even more troubling by 
the fact that small business is creating the majority of new 
jobs in today's economy. As big firms go through corporate 
downsizing, many of the displaced workers find themselves 
working for small businesses. In fact, according to the Small 
Business Administration, 75 percent of the new jobs in 1995 
were created by small business. However, because of the many 
impediments to small business retirement plan coverage, these 
workers will often find themselves without a meaningful 
opportunity to save for retirement.

         Roadblocks to Small Business Retirement Plan Coverage

1. Excessive Regulation

    Simply put, more regulation means fewer pensions. There are 
close to 4,000 single-spaced pages of regulations affecting 
retirement plans. In one instance, there are close to 200 pages 
of IRS regulations interpreting just one sentence in the 
Internal Revenue Code. The costs associated with interpreting 
and applying these regulations are enormous, particularly for 
small business because there are fewer workers among which to 
spread the cost. For example, the average cost of 
administrative expenses for defined benefit plans is 
approximately $157 per participant.\2\ However, the cost per 
participant for a small business defined benefit plan can often 
be twice that amount. Given how few small businesses provide 
retirement plan coverage for their workers, ASPA believes that 
steps should be taken to reduce the administrative costs that a 
small business faces when establishing a retirement plan.
---------------------------------------------------------------------------
    \2\ General Accounting Office, Private Pensions--Most Employers 
That Offer Pensions Use Defined Contribution Plans Table II.7 (October 
1996).

---------------------------------------------------------------------------
2. Present-Law Bias Against Small Business Plans

    Surprisingly, there are a number of present-law rules which 
work to discourage small business from establishing retirement 
plans on behalf of workers. Many of these rules grew from a 
bias that small business plans were only established by wealthy 
professionals (e.g., doctors and lawyers) and that only the 
professional, and not the staff, received any benefits under 
these plans. This is simply not the case in today's workforce. 
According to the Small Business Administration, less than 10% 
of small firms today are in the legal and health services 
fields. Small business includes high technology, light 
industrial, and retail firms which have stepped into the void 
created by the downsizing of big business. The same rules 
targeted at the doctors and lawyers also negatively affect 
these burgeoning small businesses. This is unfair and impedes 
the ability of small business to compete with larger firms when 
trying to attract employees.
    The present-law funding limits, for defined benefit plans, 
are a prime example of how overbroad legislation can have a 
disastrous effect on small business retirement plan coverage. 
In 1987, the full funding limit--the limit on the amount an 
employer is allowed to contribute to a defined benefit plan--
was substantially reduced. The changes were made solely to 
raise revenue and had nothing to do with retirement policy. As 
an actuary, I can tell you that the current law full funding 
limit seriously impairs the funded status of defined benefit 
plans and threatens retirement security because it does not 
allow an employer to more evenly and accurately fund for 
projected plan liabilities. One way to conceptualize the 
problem is to compare a balloon mortgage to a more traditional 
mortgage which is amortized over the term of the loan. The full 
funding limit causes plan funding to work more like a balloon 
mortgage by pushing back necessary funding to later years. This 
is particularly harsh on small business because a small 
business does not have the cash reserves and resources that a 
large firm has, and so would be better off if it could more 
evenly fund the plan. Even worse for small business, a special 
rule in the Internal Revenue Code relaxes the full funding 
limit somewhat but only for larger plans (plans with at least 
100 participants). Once again this appears to be a vestige of 
the view that small business plans are just for doctors and 
lawyers.
    Small business owners are aware of the present-law funding 
limits on defined benefit plans, and that is why small 
businesses with defined benefit plans are trying to get rid of 
them and new small businesses are not establishing them. From 
1987, when the full funding limit was changed, to 1993--a 
period which saw a significant increase in the number of small 
businesses established--the number of small businesses with 
defined benefit plans dropped from 139,644 to 64,937.\3\ That 
is over a 50 percent decline in just seven years. To reverse 
this trend, ASPA strongly believes that the full funding limit 
should be repealed to allow for more secure funding.\4\
---------------------------------------------------------------------------
    \3\ U.S. Department of Labor, Private Pension Plan Bulletin--
Abstract of 1993 Form 5500 Annual Reports Table F2 (Winter 1997).
    \4\ The Advisory Council on Social Security also urged in its 
recently issued report that the full funding limit be modified to allow 
better funding of private pension plans. Report of the 1994-1996 
Advisory Council on Social Security, Volume I: Findings and 
Recommendations 23 (January 1997).

3. Unreasonable PBGC Insurance Premiums on New Defined Benefit 
---------------------------------------------------------------------------
Plans

    Imagine if you had to pay premiums on a life insurance 
policy based on a $100,000 benefit, but that the policy only 
paid a $50,000 benefit. No sensible consumer would purchase 
such a policy. However, that is in fact what often occurs when 
a small business adopts a new defined benefit plan.
    Let me explain. If a newly created defined benefit plan 
gives credit to employees for years of service prior to 
adoption of the plan, the tax code funding rules limit, in the 
early years of the plan, how much can be contributed to the 
plan to fund the benefits associated with this past service 
credit. Consequently, the new plan is treated as 
``underfunded'' for PBGC premium purposes and the plan is 
subject to a special additional premium charged to underfunded 
plans. This premium is assessed even though the premium is 
based on benefits which exceed the amount the PBGC would pay 
out if they had to take over the plan. In other words, the 
small business is forced to pay premiums to insure benefits 
that exceed what the PBGC will guarantee.
    This additional premium can amount to thousands of dollars 
and is a tremendous impediment to the formation of small 
business defined benefit plans. Given the pressing need to 
expand pension coverage for small business employees, 
particularly defined benefit plan coverage, ASPA strongly 
suggests that this Committee and the PBGC consider ways to 
reduce this unnecessary burden on new small business defined 
benefit plans.

            Inadequacy of Defined Contribution Plan Benefits

    In the typical lifespan of a small business, it generally 
takes a number of years before a small business has the 
resources to establish a retirement plan. In my experience this 
does not usually occur until the small business owner is in his 
or her mid-40s and most likely both the owner and the workers 
have not previously been covered under a retirement plan. 
Consequently, they are getting a late start on their retirement 
savings, and a defined contribution plan--like the SIMPLE 
plan--may not offer enough savings to produce an adequate 
retirement income.
    Here is a straightforward example. Assume a small business 
adopts the SIMPLE plan. One of the workers who has been with 
the small business for 10 years is 45 years old when the SIMPLE 
plan is adopted and currently earns $40,000 annually. If this 
worker and his or her employer contribute 10 percent of pay 
annually to the plan until retirement at age 65, and the plan's 
investment return is 7 percent per year, the worker can expect 
to retire with an annual pension of approximately $18,000, only 
about 45 percent of his salary. Most retirement planning 
professionals will tell you that a retirement income 
replacement ratio of between 60 to 70 percent of final average 
salary is a good rule of thumb when determining whether a 
retirement benefit is adequate.
    But what about inflation? If this worker receives an annual 
salary adjustment of 4 percent per year and continues to 
contribute 10 percent of pay to the SIMPLE plan, the worker 
will only accumulate enough money to fund an annual pension 
benefit equal to 32 percent of final salary. By contrast, 
defined benefit plans can provide greater benefits at no 
greater cost to the employer. How? By anticipating salary 
increases in the plan's funding assumptions, the employer 
contributes more dollars to the plan in the early funding 
years. Because of this, more investment earnings are realized 
by the plan, and better benefits can be delivered to the 
employee.
    Despite the success of the SIMPLE plan, retirement plan 
coverage for small business workers continues to be inadequate 
because of the limitations on contributions to the SIMPLE plan. 
The administrative burdens and high costs associated with other 
qualified retirement plans providing greater benefits make it 
extremely difficult for small business to maintain such plans. 
In addition, small business workers who are baby boomers and 
who have not previously been covered under retirement plans 
will not be able to save enough under the SIMPLE plan or a 
401(k) plan to provide an adequate retirement income. ASPA 
believes small business needs a safe harbor defined benefit 
retirement plan to complement the SIMPLE plan which is easy to 
administer and which will provide small business employees, 
including baby boomers, a sufficient retirement benefit.

        Secure Assets For Employees (``SAFE'') Plan Act of 1997

    I congratulate the chair of this Committee for introducing 
a simplified defined benefit plan which addresses these needs. 
The Secure Assets for Employees (SAFE) Plan Act of 1997, 
introduced by Reps. Nancy Johnson (R-Conn.), Earl Pomeroy (D-
N.D.), and Harris Fawell (R-Ill.), creates a new safe harbor 
defined benefit retirement plan for small business which will 
provide all small business employees with a secure, fully 
portable, defined retirement benefit they can count on without 
choking small business with complex rules and regulations small 
business cannot afford. Here are some details:

1. Fully Funded and Secure Retirement Benefit

     SAFE plan retirement benefits will be totally 
secure because they will be funded either through an individual 
retirement annuity (``SAFE Annuity'') issued by regulated 
financial institutions or through a trust (``SAFE Trust'') 
whose investments will be restricted to registered investment 
securities or insurance company products.
     SAFE plans will always have to be fully funded. 
The full cost of an employee's minimum defined benefit for each 
year of service is contributed to the SAFE plan by the employer 
when earned. Each employee will have an account--either with a 
SAFE Annuity or in the SAFE Trust--where plan assets will be 
held, and each year the employee will get an account statement, 
issued by the trustee, indicating the cash balance in the 
account and what the monthly benefit will be upon retirement 
(age 65).
     SAFE plans will be required to use specified 
conservative actuarial assumptions (e.g. a 5% interest rate 
assumption) to ensure the minimum retirement benefit. In the 
unusual circumstance where actual investment returns do not 
meet the conservative actuarial expectations, the employer 
(utilizing the SAFE Trust) will have to make a current 
contribution so that there are enough assets in each employee's 
account to fund the minimum defined benefit. With the SAFE 
Annuity, since the financial institution guarantees the minimum 
benefit, no such employer contribution would be required.

2. Minimum Defined Benefit With Possible Higher Benefit

     SAFE plans utilize the best features of both 
defined benefit and defined contribution plans by providing a 
fully funded minimum defined benefit, plus a higher benefit if 
investment returns exceed conservative expectations. With the 
SAFE Annuity, this is achieved by using individual 
participating deferred annuities which would have to guarantee 
the minimum defined benefit but also would have to give some 
opportunity for a higher benefit based on investment 
performance. In the case of a SAFE Trust, if the average return 
of the assets in the employee's account exceed the required 
conservative interest rate assumption (5%), the employee will 
receive a higher benefit.
     At a minimum, employees will receive a benefit 
equal to 1%, 2%, or 3% of compensation for each year of 
service. For example, if an employee whose average salary was 
$40,000 has 25 years of service for an employer who elects a 3% 
benefit, the employee will retire with a minimum $30,000 annual 
benefit (which could be higher depending on investment 
performance). If the small business runs into financial 
difficulty in any year, it can elect to reduce the minimum 
benefit to 2% or 1%, or even zero. The percentage benefit in 
any year must be the same for all employees.
     In order to allow baby boomers to catch-up with 
their retirement savings, employers can elect to credit 
benefits for up to 10 prior years of service, provided such 
benefits are credited to all employees eligible when the plan 
is adopted and the prior service is funded over an equal number 
of years (e.g., funded over 5 years if the employee has 5 years 
of prior service). The full cost of the benefit for each year 
of prior service is funded at the same time as the benefit for 
the current year of service. Prior service could not be granted 
for prior years when the employee was covered under another 
defined benefit plan.
     An employee's benefit is 100% vested at all times.

3. Fully Portable Retirement Benefit

     Employees participating in the SAFE Annuity who 
separate from service automatically hold an individual 
retirement annuity that will pay them at least the benefits 
they have earned (and possibly a higher benefit) upon 
retirement. They can even choose to continue to fund the 
annuity themselves, and thus increase their retirement benefit, 
in accordance with current-law Individual Retirement Account 
(``IRA'') rules.
     Employees participating in the SAFE Trust will 
have their retirement benefits automatically converted to a 
SAFE Annuity, or, if they elect, have the cash balance in their 
account transferred to an individual retirement account (a 
``regular IRA''). Either can continue to be funded under 
current-law rules.
     The benefit in a SAFE Annuity may be rolled over 
to another SAFE Annuity without restriction. However, in order 
to ensure adequate benefits for retirement, benefits in a SAFE 
Annuity and SAFE Trust will be subject to substantial early 
distribution restrictions.

4. Easier to Administer

     SAFE plans will have simplified reporting 
requirements, including a simplified actuarial report verifying 
that the employer satisfied the annual funding requirement.
     SAFE plans will not be subject to complicated 
nondiscrimination rules or plan limitations. However, so that 
plan benefits are distributed fairly to all employees, SAFE 
plans, like SIMPLE plans, will be subject to the current-law 
annual limit on employee compensation ($160,000).
     Since SAFE plans are always fully funded using 
conservative actuarial assumptions, Pension Benefit Guarantee 
Corporation (``PBGC'') insurance premiums are not required.

5. Complements the SIMPLE Plan

     SAFE plans can be used with SIMPLE plans or 401(k) 
plans. However, no other defined benefit pension plans can be 
maintained if an employer maintains a SAFE plan.
     Employer eligibility, employee eligibility, and 
the definition of compensation are the same under the SAFE plan 
as under the SIMPLE plan.
     As with SIMPLE, employers using a SAFE Annuity can 
designate a financial institution.

   Secure Money Annuity or Retirement Trust (``SMART'') Plan Proposal

    I also congratulate the Clinton administration for 
supporting the expansion of small business defined benefit plan 
coverage by proposing the SMART plan. The SMART plan, which is 
heavily based on the SAFE plan proposal, is also a simplified 
defined benefit plan.
    Although there are more commonalities than differences 
between SAFE and SMART, there are some important distinctions. 
These differences could have a serious impact on the 
attractiveness of a simplified defined benefit plan to small 
businesses. ASPA certainly believes that any simplified defined 
benefit plan developed by Congress must be one that will be 
embraced by small businesses.
    Following are some of ASPA's views regarding the more 
significant differences between SAFE and SMART:

1. PBGC Insurance Premiums

    As indicated previously, given the fully funded nature of 
the SAFE plan, the SAFE plan does not require small businesses 
to pay PBGC insurance premiums. The SMART plan proposal, 
however, would require the payment of ``reduced PBGC 
premiums,'' although the exact amount has not been specified by 
the Clinton administration.
    ASPA believes that given the design of the SAFE plan, which 
must always be fully funded with specified conservative 
actuarial assumptions, the risk of loss to participants is 
extraordinarily small. Nevertheless, a reduced PBGC premium 
might enhance the marketability of the plan to small business 
since benefits would be protected even in the small likelihood 
of a loss to participants on plan termination. Consequently, 
ASPA would not have an objection if either SAFE or SMART (in 
the qualified plan form) required PBGC insurance premiums, 
provided such premiums recognize the greatly reduced insurance 
risk to the PBGC and are substantially less than the current 
premium of $19 per participant.

2. Conversion of Participant's Account Balance to Individual 
Annuity at Retirement

    Under the SAFE plan proposal, benefits at retirement age 
(i.e., age 65) are based upon the amount in the employee's 
account. The employee can elect a lump sum or annuity purchased 
with the balance in the employee's account. Given the 
conservative actuarial assumptions, in most cases the employee 
should receive a benefit higher than the benefit under the 
plan, whether in the form of a lump sum or annuity. However, in 
certain circumstances, if the employee elects to receive 
benefits in the form of an annuity, it is possible the amount 
in the employee's account will be insufficient to purchase an 
annuity providing the employee's specified benefit. This is 
because the market for purchasing annuity contracts on an 
individual basis is extremely inefficient. Because small 
businesses have minimal purchasing power, it is often 
impossible to find an insurer willing to sell a competitively 
priced individual annuity contract. For example, as the ACLI 
will testify, it is unlikely an insurer would offer an annuity 
with a 5% rate of return. It is more likely that a lower rate 
of return would be available, which raises the cost of the 
annuity.
    In practice, this issue generally will not cause problems 
for the following reasons: a) most employees will elect to 
receive their benefits in a lump sum rolled over into an IRA; 
and b) excess earnings allocated to an employee's account 
should offset the higher annuity costs.
    Nevertheless, the remote possibility does exist that the 
employee's account will not have enough to purchase the 
promised annuity. The SMART plan proposal addresses this by 
requiring the owner to contribute extra money to the employee's 
account at retirement, above the annual funding requirement, to 
pay for any shortfall that may exist should the employee elect 
an annuity. With SAFE, I understand that it was decided not to 
do this because there was concern small business owners would 
be discouraged from adopting the plan if faced with this 
possible additional liability.
    The PBGC, in its testimony, emphasizes this distinction 
between SMART and SAFE. They characterize the issue by stating 
that ``SMART is a true DB plan,'' and implying that SAFE is 
not. While ASPA strongly disagrees with this characterization, 
ASPA does agree that it would be preferable if participants 
could elect to receive an annuity paying the full amount of 
their specified benefit in every instance. Consequently, ASPA 
would not object if the approach used in the SMART plan 
proposal to address this issue was incorporated into the SAFE 
plan. However, given the difficulties described earlier that 
small plan sponsors have when purchasing individual annuity 
contacts, ASPA strongly suggests that this Committee consider 
the proposal described in ACLI's testimony to allow the sponsor 
of the SAFE plan to select from a range of interest rates from 
3% to 5% upon adoption of the plan. This will allow the SAFE 
plan to be funded at levels that more closely resemble the 
individual annuity market.
    In addition, we would suggest that the PBGC be given 
authority to develop methods for small business owners to 
purchase individual annuities on a more competitive basis. For 
example, the PBGC could facilitate negotiating master contracts 
with insurance companies which could be used by small business 
owners sponsoring a SAFE plan.

3. Employer Eligibility

    Like SIMPLE plans, SAFE plans can be adopted by employers 
with 100 employees or less. The SMART plan proposal uses the 
same approach, except professional service employers are 
excluded and a SMART plan may not be adopted if the employer 
maintained another defined benefit plan within the last five 
years. ASPA strongly disagrees with these limitations.
    There is no sensible tax policy that justifies excluding 
professionals from eligibility. If the concern is potential 
abuse, the SAFE plan has built-in design features like caps on 
the available benefit formulas and limits on the amount of 
annual compensation (i.e., $160,000) that are taken into 
account which prevent such abuse. The fact is, some non-
professionals, like skilled tradesman, often make more than so-
called professionals in today's workforce. As long as everyone 
is on a level playing field in terms of plan design, a group of 
employers should not be excluded simply based on what business 
they are in.
    Similarly, a small business should not be punished for 
previously offering a defined benefit plan. The SMART plan 
proposal does this by not allowing adoption of the SMART plan 
if the employer had a defined benefit plan in the last five 
years. If the Clinton Administration is concerned about 
individuals doubling up on benefits, ASPA believes the approach 
taken by the SAFE plan is the better approach. Under the SAFE 
plan, employees are not allowed prior service credit for years 
they were previously covered under a defined benefit plan.

4. Past Service Credit

    One of the chief policy goals of the SAFE plan proposal is 
to allow small business employees who have not previously been 
able to save sufficiently for retirement to catch-up with 
respect to their retirement savings. Defined benefit plans are 
ideally suited for this because they can provide benefits to 
employees for years of service prior to adoption of the plan. 
The SAFE plan accomplishes this by allowing a small business to 
give current employees up to 10 years of past service credit. 
To encourage the small business to maintain the plan, such past 
service credit would have to be funded over an equal number of 
years (e.g., 5 years of past service would have to be funded 
over 5 years).
    Unlike traditional defined benefit plans and the SAFE plan, 
the SMART plan does not allow for any past service credit. In 
ASPA's view, small businesses will simply not adopt the SMART 
plan unless it allows small business employees to catch-up with 
respect to their retirement savings. The SMART plan attempts to 
compensate for the lack of past service credit by allowing for 
an additional 1% benefit during the first five years of the 
plan. However, this is completely inadequate since it does not 
allow the small business to reward existing employees who have 
contributed to the development of the small business prior to 
adoption of the plan.

5. Compensation Limit

    The annual limit on compensation that may be taken into 
account for benefit purposes under the SAFE plan is $160,000 
(indexed). This is the same limit in current law that applies 
to SIMPLE plans and all other qualified retirement plans.
    Under the SMART plan, the proposed annual compensation 
limit is $100,000. ASPA strongly believes there is no 
justifiable policy reason for imposing a special lower 
compensation limit. Because it is a defined benefit plan, 
benefits provided to lower-paid workers under both the SAFE and 
SMART plans are significant and substantially greater than what 
is provided under the SIMPLE plan. The owners of small 
businesses need an incentive to provide these greater benefits 
to lower-paid workers. However, the compensation limit will 
potentially reduce the small business owners' benefits. Simply 
put, given the significantly greater benefits for lower paid 
workers under both SAFE and SMART, lowering the compensation 
limit is going in the wrong direction and the compensation 
limit under SMART should at least be the same as under SIMPLE 
and current law.

                               Conclusion

    As early as President Carter's Commission on Pension Policy 
in 1981, there has been recognition of the need for a cohesive 
and coherent retirement income policy. ASPA believes there is a 
looming retirement income crisis with the convergence of the 
Social Security trust fund's potential exhaustion and the World 
War II baby boomers reaching retirement age. Without a thriving 
pension system, there will be insufficient resources to provide 
adequate retirement income for future generations. In 
particular, four elements have converged to create this crisis:
     The baby boomer population bubble is moving 
inexorably toward retirement age.
     Private savings in the United States has declined 
dramatically.
     Most employees, particularly small business 
employees, continue not to be covered by qualified retirement 
plans.
     In the absence of major changes, our Social 
Security system is headed for bankruptcy.
    During the years 2011 through 2030, the largest ever group 
of Americans will reach retirement age. Without a change in 
policy or practice, many of this group will find themselves 
without the resources to be financially secure in retirement. 
Most pension practitioners will tell you that the constantly 
changing regulatory environment has created more complexity 
than most employers are willing to bear; consequently, coverage 
under qualified retirement plans has dropped. The problem has 
affected small businesses most severely--they have less 
resources to pay the compliance costs and must spread those 
costs over fewer employees. During the early decades of the 
next century, the ratio of workers to retirees will be 
significantly lower than it is today. The shrinking ratio of 
workers who pay Social Security to those drawing benefits makes 
it likely that future retirees will have to rely more on 
individual savings and private pension plans and less on Social 
Security. A generational economic conflict is inevitable unless 
immediate action is taken.
    We believe there is need for constructive pension reform, 
particularly with respect to small business retirement plan 
coverage. We believe that the time has come to enact 
comprehensive legislation which will provide an opportunity for 
all working Americans to obtain financial security at 
retirement.
      

                                


    Mrs. Johnson of Connecticut. Thank you very much.
    It's a pleasure to welcome you, Mr. Fradette from Bristol, 
Connecticut, to today's hearings. I'm glad you were able to 
make it.

 STATEMENT OF GREG FRADETTE, SR., GREG FRADETTE AGENCY, INC., 
                      BRISTOL, CONNECTICUT

    Mr. Fradette. Thank you, Madam Chairman. Thank you for 
inviting me to testify before your Subcommittee today. I 
appreciate this opportunity to explain why current pension laws 
have made it difficult for me to offer complete retirement for 
my employees.
    My name is Gregory Fradette and I am owner and founder of 
the Greg Fradette Agency--a 10-year-old insurance agency 
located in Bristol, Connecticut. I currently employ 13 people--
many of whom have been with me for a number of years. The Greg 
Fradette Agency sells a wide variety of insurance products. 
Business customers represent approximately 85 percent of our 
client base. And as you are well aware, Madam Chairwoman, 
Connecticut is home to many small manufacturers. These 
manufacturing companies represent the backbone of our agency, 
accounting for half of our business.
    Although we are a small business, I am proud of the level 
of benefits that we offer our employees. Comprehensive health 
insurance, including prescription drugs and dental coverage, 
life insurance, short-term disability income, paid vacation, 
flextime and a matching 401(k) plan are all part of the 
standard benefit package of the Fradette Agency. In addition, 
our agency has had five babies in the last 10 years. We're 
happy to say that we were able to accommodate our young working 
mothers with a flexible work schedule. All of our soon-to-be 
soccer moms are back to work full time. Thanks in large part to 
the efforts of our employees, business is good.
    I'd like to expand the retirement package to include a 
traditional defined benefit pension plan. Currently, 
participants in our 3-year-old 401(k) plan can contribute up to 
3 percent of salary, and we will match that by 50 percent. 
While I am pleased with the success of the 401(k) plan so far, 
I recognize that this will not generate a sufficient amount of 
retirement income for either myself or my older employees. That 
is why I am researching the feasibility of establishing a 
defined benefit pension plan.
    However, I am told that the complex regulations of current 
pension law would make it very costly for me to establish a 
plan that would provide a more adequate retirement income for 
my employees. Large employers can spread these administrative 
costs over a large number of employees. I don't have that 
luxury. Establishing a traditional pension plan is cost-
prohibitive for me at this time. That is why I support your 
SAFE plan proposal, which will allow me to adapt a small 
business defined benefit plan with significantly reduced 
administrative costs.
    I am blessed with dedicated, hardworking employees, and I 
would like to provide an affordable pension plan for them, but 
in order for me to do so, the laws need to make it possible for 
small employers like me to establish such affordable plans.
    On a personal note, Madam Chairwoman, from 1986 to 1994, my 
wife and I paid to send our three children through college. 
We're proud of the fact that all three graduated. But college 
tuition, along with the startup costs of my agency, used up all 
our savings. Now, at age 50, I have to start saving for our 
retirement. So please enact the SAFE plan proposal as soon as 
possible, so that my employees and I can start saving 
adequately for our retirement.
    And thank you again for the opportunity to testify today, 
Madam Chairwoman.
    [The prepared statement follows:]

Statement of Greg Fradette, Sr., Greg Fradette Agency, Inc., Bristol, 
Connecticut

    Madame Chairman, thank you for inviting me testify before 
your subcommittee today. I appreciate this opportunity to 
explain why current pension laws have made it more difficult 
for me to offer complete retirement benefits to my employees.
    I am owner and founder of the Greg Fradette Agency, a 10 
year old insurance agency located in Bristol, Connecticut. I 
currently employ 13 people, many of whom have worked for me for 
years. The Fradette Agency sells a wide variety of insurance 
products, about 85% of which is to commercial customers. As you 
know, madame chairman, northwest Connecticut is home to many 
small manufacturing companies. My agency has a close working 
relationship with many of these companies, who represent over 
half of my overall business.
    As a small business owner, one thing I am proud of is the 
level of benefits I offer my employees. Comprehensive health 
insurance, life insurance, paid vacation, profit sharing, and a 
401(k) plan with employer matching contributions are all part 
of the standard benefits package at the Fradette Agency.
    However, now that my business has become more established, 
I am in the position to expand the retirement package that the 
company offers to include a traditional defined benefit pension 
plan. Currently, participants in our three-year-old 401(k) plan 
can contribute up to three percent of salary, which is then 
matched fifty cents on the dollar by the company. Over two-
thirds of my employees participate.
    While I am pleased with the operation and success of our 
401(k) plan so far, I recognize that this will not generate a 
sufficient amount of retirement income for either myself or any 
of my older employees. Therefore, I am researching the 
possibility of establishing a defined benefit pension plan. 
However, I am told that under current law, complex regulations 
make it not very cost-effective for me to establish such a plan 
which will provide a more sufficient retirement income for my 
employees. Because I can spread the administrative costs over 
fewer employees as compared to a large employer, setting up a 
traditional pension plan is cost-prohibitive for me at this 
time. That is why I support your SAFE plan proposal which will 
allow me to adopt a small business defined benefit plan with 
significantly reduced administrative costs.
    I am fortunate to have dedicated, competent employees 
working for me, and I want to be able to provide this benefit 
to them. But in order for me to do so, the laws need to make it 
possible for small businesses to establish plans in a cost-
effective way. Please enact the SAFE plan proposal as soon as 
possible so that baby boomers like me and my employees can save 
adequately for retirement.
    Thank you for the opportunity to testify today, madame 
chairman.
      

                                


    Mrs. Johnson of Connecticut. Thank you very much.
    I apologize to those members of the panel whose testimony I 
was unable to hear, but also to Mr. Strauss, and I thank my 
colleague, Mr. Portman, for starting this hearing.
    You may have read in the newspapers of the terrible 
incident in Connecticut where four State employees were killed 
by an angered member of their group, and I mention that because 
people who serve in government are important to all of us. A 
good functioning government is essential to a free society, and 
some of those who do serve, our citizens, do often run a lot of 
risk from the public they deal with, but also in the 
constraining governance of employee problems that we all live 
with. And so it was my not only obligation, but personal 
responsibility to be at the funeral of my friend and 
compatriot, Linda Laganowski, former mayor of New Britain, my 
hometown, who was one of those, but also to take part with the 
Governor in recognizing the service of these individuals to our 
State and the tragedy of their death. They were all 
extraordinary people. It was tragic to read of their lives left 
behind--spouses, children, volunteers in their community, 
coaches of little league, all the things that we know make a 
difference in building our communities and assuring the strong 
families that we know are the heart and soul of a free society.
    So I'm sorry that I had to be late, and I appreciate the 
help of my colleague, Mr. Portman, and the indulgence of all of 
you.
    I would like to, first of all, commend you, Ms. Shaffer, on 
the pamphlet, ``On Women's Retirement.'' I did have a 
conference on women and investing recently, had a very small 
turnout, but it was really interesting some of the people who 
came. Women are beginning to realize that they have a 
responsibility to plan for their own retirement, whether 
they're single or whether they're married.
    I also appreciate some of the comments that those who 
testified made in regard to the differences between SAFE and 
SMART, and I want to concentrate my questions on two aspects of 
the differences between SAFE and SMART, and then throw out one 
other question.
    First of all, SAFE allows 1 to 3 percent, a program that 
would provide 1 to 30 percent of income to be saved each year. 
The SMART program is less generous, both in threshold of 
$100,000 and in the use of the 3 percent. When you look at the 
calculations from each plan, neither plan is talking about more 
than, say, about 30,000 a year or 22,000 a year, I think is 
what most of them are. Now 22,000 a year with a relatively low 
Social Security benefit is not a lot, looking to the future. So 
it seemed to me unwise to limit the 3 percent option as it is 
limited in SMART. That's one issue I'd like to hear your 
thoughts on.
    Second, I was very interested, Mike, that you think the 
pension guarantee benefit premium is a good idea. I'd like to 
hear other people's thoughts on that, but it seems to me 
unnecessary to ensure a fully funded plan.
    And then, last, on the issue of spousal consent, that has 
become kind of a two-edged sword. I have an employer who came 
to me just last week saying that he must have these spousal 
consent forms because they're making changes in their plans, 
but now some of the families that are having difficulty don't 
want to get them. And these are women who don't want to deal 
with their spouse about this, for a variety of possible 
reasons. So that is an issue.
    Incidentally, I also want to acknowledge my colleague and 
friend, Earl Pommeroy, who is with us, and will have a chance 
to question after the Subcommittee Members do so.
    So if you could comment on the 3 percent issue, the pension 
benefit guarantee fund premium, for those of you who didn't 
comment on that, and the issue of spousal consent. Is it time 
that we begin to look at that differently? Maybe if your other 
spouse has a pension at his place of his business that comes 
out of his wages or his determination--you know, how do we 
begin to look at spousal contributions now in the sense of 
ownership that I see in lots of women in all ages of their 
benefits, sort of in the new world?
    When we got that spousal consent--and I remember sitting at 
the White House when Reagan was President, and we, on a 
bipartisan basis, got this change in the law, it was primarily 
because women weren't working; men were the ones who were 
working, and whether or not their husbands' pension planned 
allowed or assured that choice was a very, very important 
issue. When both people are working and have different options 
for retirement benefits, we need communication and agreement 
perhaps, but do we see the spousal benefit exactly the same way 
for the next 50 years that we saw it, say, 10 years ago?
    Ms. Shaffer. Well, obviously, it's a very complex issue, 
and it is true that working women now are more present in the 
work force than ever before. But when you cite the average pay 
equity statistics for women in the work force, which have been 
compounded in retirement to create a retirement gender gap, I 
would think that at this point in time, for the average woman, 
we would want to err on the side of disclosure and spousal 
options. Because those women, in general--and there are, 
obviously, exceptions--are still going to be earning less than 
their male spouse, are going to have given up years in the work 
force for care giving responsibilities. This formula will 
affect their retirement benefits, as well as, their Social 
Security benefits--all three legs of that retirement planning 
stool, and, in general, those factors would still create a real 
disadvantage for women not having choices, not having 
participation in those choices, because they are going to 
likely earn less than their husband.
    So to the extent that women and their families are 
dependent on these options, we need, I think, at this point to 
preserve them. Obviously, as time goes on, if the pay gap 
erodes to the point where we have more parity, more equity, 
perhaps this will be less of an issue, but these factors for 
working women truly exacerbate their vulnerability in 
retirement.
    And, incidentally, some of those poverty statistics that I 
quoted, comparing particularly single women in retirement and 
single men in retirement, for example--I shortened my remarks 
because of the time constraints, but there's a chart showing 
that the United States of America has a higher rate of single 
women living in poverty than any of the industrialized nations. 
That truly gives one cause for concern and kind of puts that in 
perspective. Hopefully, there will be a point in time where 
maybe those issues should be revisited, but I think we need to 
err on the side of spouses having an opportunity to participate 
in the decision--and certainly in divorce situations, spouses 
knowing before divorce agreements are finalized--what rights 
and options they may have to exercise.
    I also wanted to correct one impression. I cited this 
pamphlet, but it is not a BPW publication. It is a project of 
WISER, Women's Institute for a Secure Retirement, and the Heinz 
Foundation. We are helping to distribute it to all our members 
across the country, and we commend WISER for producing this.
    Thank you.
    Mrs. Johnson of Connecticut. Thank you. Anyone else want to 
comment on the other issues?
    Mr. Leonard. I would like to comment on that, too. 
Enforcing what Gail said, my wife works full time; I work full 
time. I make 70 percent of the income; she makes 30 percent. So 
if she did not have the opportunity to investigate pensions and 
have spousal consent, she would be in the same type of trouble 
that Gail mentioned.
    Mr. Callahan. At PenTec, Madam Chairwoman, we probably 
process somewhere close to 4,000 to 5,000 distributions 
annually, and though there's an administrative cost or burden 
that's associated with that, we don't really see very many 
problems with getting those spousal signatures. I think in 
terms of looking at those spousal signatures and ensuring that 
there's a knowledgeable decision that's made, it certainly 
relieves the employer of some fiduciary responsibilities, and 
it's knowledge that's being gained by having those spousal 
signatures. So I agree with Ms. Shaffer. I think it's not time 
yet.
    Mrs. Johnson of Connecticut. What about the issue of the 3 
percent option?
    Mr. Merolli. I'd be happy to comment on that. I don't feel, 
quite honestly, that the 2 percent is sufficient. The SMART 
minimum defined benefit is either 1 or 2 percent, and it 
increases to 3 only during the first 5 years of participation. 
SAFE is 1, 2, or 3 percent, and you can use 10 years of past 
service as well.
    If you're a gentleman like Mr. Fradette, and your children 
have gone through college, you're 50 years old now, and you 
want a simple way to save a lot of money in a short period of 
time. I think taking into account the fact that you can go up 
to 3 percent benefit times years of service and use up the 10 
years of past service means that you can catch and you can fund 
an adequate benefit for your own retirement now that you have 
put your children through school. I think $160,000 compensation 
limit also ties in with that, and I think it's much more 
beneficial and much easier to handle than $100,000 cap.
    We deal with small plans all the time. We have 1,400 plans 
that we act as third-party administrator for. Our defined 
benefit total has shrunk to less than 100, and a lot of those 
folks, like Mr. Fradette, are right now, if they want something 
simple, they have to stay with defined contribution. I think 
with using SAFE, with 10 years of past service and a 3 percent 
annual rate of accrual is the way to go.
    Mrs. Johnson of Connecticut. Thank you. There's a very, 
very important point. This Subcommittee changed the pension 
laws in regard to teachers last year, for exactly that reason. 
They have buyback rights, but they were capped, and you can't 
exercise your buyback rights because you don't have any money 
to buy back until later in life, when your children have 
finished college, and then they were limited as to how much 
they could buy back, even though the buyback was absolutely 
legitimate, and something they had earned.
    So this one goes not necessarily to the pattern of women's 
lives, but to the pattern of our lives--men and women. There 
are years when you have disposal income, and there are years 
when you don't. If we limit these pension plans so that you can 
never save more than a rather minimal amount, then we limit 
retirement benefits as well. So that's interesting.
    Mr. Coyne, I'd like to yield to Mr. Coyne for questioning.
    Mr. Coyne. Thank you, Madam Chairwoman.
    Mr. Fradette, in your testimony you mentioned that two-
thirds of your employees are participating in the 401(k) plan. 
One of my concerns is that the pension system that we're 
currently under has a lot of employees who are unwilling or 
unable to participate in plans, 401(k) plans, just like some of 
your employees.
    I wonder if you could tell us, not just in your company, 
but generally, who are the individuals that make up the one-
third that don't participate? Are they people who are low-
income workers or short-term employees? Do you have any sense 
of that?
    Mr. Fredette. Well, in our particular case, we're dealing 
with just 13 employees, and there are 2 or 3 who aren't 
participating. They're fairly young, and at this particular 
point I think they'd just as soon take all the income, and 
hopefully, as time goes on and they become more secure in their 
job, they'll see the light and participate in the 401(k), but 
that's really what's going on right now at our agency.
    Mr. Coyne. It's the younger employees who maybe feel that 
they don't have the resources to be able to contribute----
    Mr. Fredette. Exactly.
    Mr. Coyne [continuing]. Into the 401(k) plan?
    Thank you.
    Mrs. Johnson of Connecticut. Mr. Portman.
    Mr. Portman. Thank you, Madam Chair. I have a lot of 
questions. I really appreciate all the expert testimony.
    My first question is really a basic one, which is: Who's 
going to use this plan? How popular is it really going to be? 
We've heard a lot of good testimony today about how the SAFE or 
SMART or SMART/SAFE plan might be important. I talk to a lot of 
small businesses who are interested in some kind of retirement 
savings plan, but they're not sure if they can get into a 
defined benefit plan. They're more interested in a SIMPLE type 
plan. And I wonder if any surveys have been done, if you all 
have talked, on an informal basis with your plan participants? 
You said, Mr. Merolli, I think you have over a thousand plans 
you work with; and, Mr. Moore, you work with a lot of plans 
around the country. Is this going to be something that will be 
popular?
    Mr. Merolli. I think it will be very, very popular. We have 
a lot of baby boomers, myself included, who have reached a 
point, like Mr. Fradette, and they need to save a lot of money 
in a very, very short period of time, and the complexities of 
present-day defined benefit law have basically shied them away 
from it, and I think it's going to be a very, very strong 
market. I feel better about this than I did about SIMPLE, and 
SIMPLE's been pretty good.
    Mr. Moore. I'd share that assessment. I think it will be 
attractive to the small employer and the small business 
employee.
    And I wanted to tie in one point that was raised earlier 
about the catchup provision of the 3 percent. I think this is 
another reason it's attractive. If you're a younger person, as 
was pointed out, and maybe you're not participating now, and 
you get to be 40 or 50, and you realize you should have been 
catching up. There might be a tendency to make what would be 
riskier or high-risk investments.
    Mr. Portman. Yes.
    Mr. Moore. This provides a very equitable and safe 
mechanism for you to catch up by recognizing past years of 
service. It's a very safe plan for all of us, and I think it's 
a great opportunity for somebody to catch up in a fair manner.
    Mr. Portman. Mr. Callahan.
    Mr. Callahan. Congressman Portman, there are some rules of 
thumb that I'm going to provide just as a general approach. If 
you take a look at a person who's about 20, 22 years old, a 2-
percent-of-pay-per-year contribution provides him adequate 
retirement income. When you get to 30, it jumps to about 6 
percent of pay. When you get to 40, it increases to close to 20 
percent of pay. And when you get into your fifties, you're now 
looking at a program that you cannot have under our current 
system. So that leaves us with a real problem at retirement age 
because people just can't accumulate enough.
    In addition to that, people don't really know what the 
conversion is: How much do they need? The number here was 
somebody earning around $28,000 needs one-quarter of a million 
dollars to retire. Most employees don't understand that number. 
They think if they have $50,000 or $60,000 that they've 
accumulated over their lifetime, that that's going to last them 
for 20 years. It's not enough. It's not even close to being 
enough.
    So what we're going to find is some generational gaps where 
people are just going to live longer than what they have 
available to them, and it's going to be a substantial 
curtailment in their lifestyle. This kind of program, which has 
a guaranteed benefit, a floor benefit with an upside to it, 
provides that guaranteed minimum benefit. People understand 
that. They know what their monthly benefit is, and when added 
to Social Security and some personal savings, can provide an 
adequate retirement income. That's why this is so important.
    Mr. Portman. I think those are adequate responses. I share 
those. My question was in a way a devil's advocate question. I 
think it's time for us to really fill a gap, a major gap, and 
part of it is that young people think they're going to live 
forever, as many of us did, I'm sure, didn't prepare, and when 
you get to be a baby boomer, my age, over 40, you begin to 
realize you need to catch up quickly, and it's difficult to do 
so with a defined contribution plan.
    With regard to the PBGC guarantee, I think, Mr. Merolli, 
you had some strong views on that. It wasn't necessary. Mr. 
Moore, I think you thought it was important, which is, as you 
know, contained in the SMART plan, not the SAFE plan.
    I guess one question I would ask for the panel, and maybe 
quickly those of you who are out in the business of marketing 
plans or have been involved with companies that are looking for 
these kinds of plans, Mr. Strauss made the point that he had 
talked to at least--he mentioned one person in the business who 
said this was going to be a great marketing tool because 
companies would be much more likely to pick up a plan like 
SMART or SAFE if they knew the Federal Government was behind 
it. Is that your experience? And how does that balance with the 
premium responsibility?
    Who'd like to take a crack at it first? Mr. Moore, maybe 
first, and then Mr. Merolli.
    Mr. Moore. I generally share Mr. Strauss' assessment. I 
think you have to look at it from the perspective of who's 
going to be participating also. If there is a sense of security 
that the PBGC stands beside that, then it's going to be very 
easy for the employer, quote/unquote, ``sell his program.'' So 
from that sense, marketability, yes, absolutely.
    Mr. Portman. OK, Mr. Merolli.
    Mr. Merolli. Up until now, PBGC premium, the requirement to 
be in PBGC has not been a positive as far as a marketing 
standpoint because it's added a lot of complexity. PBGC forms 
are pretty extensive. And currently, professional service 
employers of under 25 employees are exempt from PBGC anyway. If 
you're a small business with just a couple of people and no 
rank-and-file workers as well, you don't have PBGC coverage 
currently, and that system seemed to be working pretty well. If 
we wind up with PBGC coverage, though, it should be a really 
nice, simple, little form like one little simple page with a 
really tiny, little premium.
    I think it has in the past been an added expense. It's 
discouraged and it's made defined benefit plans unaffordable 
for a lot of small employers, particularly the ones we've been 
trying to hit at. That's been our experience.
    Mr. Portman. He told us today a number. It wasn't in his 
testimony, but in his oral response he said five dollars. Is 
that a nice, little, tiny amount?
    Mr. Merolli. I would consider that a nice, little, tiny 
amount.
    Mr. Portman. Mr. Callahan.
    Mr. Callahan. I think we have to look at who's our 
customer. Our customer for these retirement benefits is a plan 
participant. From the employer's perspective, it's a hidden 
tax, especially if they have to make this as a fully funded 
benefit. From the customer's point of view, from the plan 
participant, having that added security of providing that 
minimum benefit, I think it's important issue.
    So when we take a look at who's the ultimate beneficiary of 
this and who's our ultimate customer, I see that----
    Mr. Portman. But the question is, who is the customer? 
Who's going to be making the decision to go into these plans? I 
guess in many cases the employees are going to go to the 
employer and advocate for such a plan. So maybe, in a sense, 
they can be the indirect customer, but in most cases I would 
guess it's the employer making the decision.
    Mr. Callahan. I don't think it's an insurmountable barrier, 
but as a hidden tax, it can be----
    Mr. Portman. How do you come out on the type of plans we're 
talking about here, the SAFE plan, for instance, do you think 
it needs to have the PBGC guarantee?
    Mr. Callahan. I'm sorry, would you say that again.
    Mr. Portman. How do you come out on the issue?
    Mr. Callahan. I think it's reasonable to have a PBGC-backed 
guarantee as long as----
    Mr. Portman. You would prefer to have one?
    Mr. Callahan. If it's small. If the guarantee is for the 
full benefit, the remaining full benefit, and the premium is 
small, then, yes. If it's the current guaranteed benefit 
premiums, I don't think that offers.
    Mr. Portman. OK. Thank you. Thank you for your help today.
    Mrs. Johnson of Connecticut. Mr. Kleczka.
    Mr. English.
    Mr. English. Thank you, Madam Chair.
    This, it seems to me, is a very important topic, and we 
appreciate a panel of this distinction being here to explore 
it. What we have learned is that, increasingly, the experience 
of employees is going to be a little different than it has been 
in the past. More and more, people will be going to different 
employers during the course of their career, and it's estimated 
in the next century that it's going to be relatively common for 
someone to have five or six different employers during their 
lifetime.
    So I wanted to focus a little bit on portability. In your 
view, can the law be improved to give participants in defined 
benefit plans the same portability features as the participants 
in defined contribution plans? Who would like to comment on 
that? Mr. Leonard?
    Mr. Leonard. Yes, thank you very much. The IEEE has been 
advocating pension portability since about 1974. I think the 
SAFE plan, as you're proposing it, is an excellent way to 
provide portability to small companies. Our engineers are 
looking at the same thing you mentioned--seven or eight job 
changes throughout their entire career. The engineer that goes 
to work for one company and stays there until he retires is 
gone. Maybe I'm the last one, but there aren't many left. Even 
some engineers are starting their own consulting firms right 
out of school.
    So, for small companies, a SAFE plans is what we need. For 
large companies, an ability to transfer their pension from one 
company to another company by possibly Trustee to Trustee 
transfer, maybe be a method of examining pension portability or 
defined benefit plans for large companies.
    Mr. English. Mr. Leonard, how does your organization feel 
about, putting the SAFE and SMART proposals side by side, how 
do you feel about the $100,000 limit specifically that's built 
into the SMART plan?
    Mr. Leonard. I'd say I don't like it. I'm more for the 
$160,000 limit. And if I might comment further, we are for the 
SAFE plan. The SMART plan has a clause in it that excludes our 
type of professionals working as service employees. So IEEE 
would be for the SAFE plan.
    Mr. English. I'd open this up to the other panelists, on 
how you feel specifically on the portability end, how the SAFE 
and SMART proposals stack up against each other, and what 
features you're particularly attracted to in either?
    Mr. Merolli.
    Mr. Merolli. Yes. Thank you. The beauty about the SAFE plan 
is that each participant's benefit, unlike a traditional 
defined benefit plan, which is a pooled account, in SAFE each 
participant's benefit is kept in their own separate account. So 
all the benefits are, and should remain, totally portable. When 
the individual terminates from employment, for example, either 
a SAFE annuity or the SAFE trust can be transferred to a SAFE 
annuity or to a traditional IRA, for example, or the 20-percent 
penalty tax is paid. The 20-percent penalty tax, obviously, 
discourages people from taking their distributions before 
retirement, and the SAFE is structured this way, so that it 
becomes totally and fully portable. And that's the beauty we 
like about it, and that's the advantage it has over the 
traditional defined benefit plan.
    Mr. English. Any other comments from the panel?
    Ms. Shaffer. Well, I would reiterate, from the point of 
view of BPW/USA, that one of the features we applaud in the 
SAFE plan is the portability. As I indicated, women tend to 
stay in a particular job on average for a lesser period of time 
than their male counterparts. They sometimes don't even vest in 
that job because of that, which is unfortunate. The average 
woman worker will lose during her career 11.5 years in the work 
force, most often because of care giving needs, she has to 
leave the work force and then come back again. So, certainly, 
both with the care giving absences from the work force that are 
particularly imperative sometimes for women, and the tendency 
on the average for them to change from job to job more often, 
portability is a very, very important feature. So we very much 
applaud that in the SAFE plan.
    Mr. English. Well, I would at this point, my time having 
expired, like to thank the panel, but also add, since I haven't 
had the opportunity to do so publicly before, I would like to 
thank the Chair for sponsoring this hearing, which I think is 
one of the most important that we have had, not only in the 
Subcommittee, but the Committee as a whole.
    I want to compliment you specifically, Madam Chair, on your 
leadership on this issue and building a bipartisan coalition to 
focus on some of these very difficult pension issues, and I 
want to compliment you very much for your effort in this area, 
and thank you for the opportunity.
    Mrs. Johnson of Connecticut. Well, thank you very much, Mr. 
English. There has been a lot of interest among the Members of 
the Subcommittee in this issue, and we've talked about it now 
for quite a while, and this is the first of two hearings, out 
of which we hope will come some substantial advancements in the 
opportunity for people to create retirement security for 
themselves.
    Mrs. Thurman.
    Mrs. Thurman. Thank you, Madam Chairwoman.
    Mr. Moore, we've received a report actually from some of 
our colleagues--I've lost in it in the myriad of paper up 
here--but, anyway, that while we know that about half of the 
employees have pensions. The other significant issue in there, 
though, is that around 21 percent of them actually make maximum 
contributions to this.
    How do we change that culture of have fun now and wait for 
Social Security later, or maybe you'll have enough later on in 
your life? What do we do to look at this issue?
    Mr. Moore. I'm sorry, I think I might have missed part of 
your question. Were you saying that they're spending the moneys 
in their----
    Mrs. Thurman. Well, even if they have a pension plan 
available to them, in fact--only about 21 percent are actually 
contributing their full amount that they could contribute 
anyway.
    Mr. Moore. I think that SAFE goes a long way toward helping 
people not only focus on the importance of retirement, but 
making it easy for them to do. The biggest problem I see is the 
fact that we actually run across the converse problem, and we 
probably deal with anywhere between 3,000 and 5,000 phone calls 
and letters a year about problems with pensions. The biggest 
problem is that they just don't have money to set aside.
    The problem you're describing with us tends to be a very 
small problem. I think people are very conscious of what their 
retirement needs are. Unfortunately, there are a lot of other 
competing needs that are much more immediate. Buying a house, 
any sort of child needs sometimes arise, special circumstances, 
and those things take precedence, and they are immediate, 
whereas retirement is further down the road. It's the classic 
case of robbing Peter to save Paul, but in this instance you're 
one and the same; you're Peter and Paul.
    And the problem for us is, how do we get a structure that 
limits--and one of the nice things about SMART, there is a 
substantial distribution, early distribution, penalty, to let 
people say, stop, wait a second, is this really important 
enough to jeopardize your retirement future? And in those 
instances where it is you go ahead. But I think the real 
fundamental problem is that it's not a lack of awareness of 
people's parts here; it's a lack of an ability to have access 
money. They just don't have it.
    Mr. Callahan. Mrs. Thurman, I provide enrollment meetings 
to different companies. During the course of 1 year, I probably 
do 40 or 50 enrollment meetings personally to companies' 
participants. There are a couple of things that I find that 
people are just not aware of. One, that there was supposed to 
be a three-legged stool for retirement purposes in the United 
States: Social Security, an employer plan, and their own 
contributions. That's clearly not understood at all. They never 
knew that they were supposed to take responsiblity for of their 
retirement income. No one really knew who was supposed to take 
care of it, but they never knew that they were responsible for 
one-third.
    Second, most knew somebody at one time that might have had 
a defined benefit pension plan, but those plans are all gone 
now, and nobody really takes care of pensions anymore. People 
believe they'll figure it out and do what they have to do.
    We often have the discussion about the fourth leg to our 
retirement stool in the United States, in our employee 
enrollment meetings. And that fourth leg is really 
supplementing your income through continued working past 
retirement. So we now have, just by its nature of our policy 
here, developed that fourth leg of continued working.
    The shift over to the 401(k) plans is a clear indication to 
anyone looking at policy issues that we have shifted the entire 
responsibility for retirements for our future generations over 
to the employees, and this is one of the first chances to shift 
it back.
    Ms. Shaffer. I would also like to add the comment that, if 
we want to encourage that kind of incentive for saving--for 
example, from the point of view of working women--we would be 
well advised to address the issue of pay inequity, and support 
the Fair Pay Act and the equal pay provisions, because women 
have far less disposable income to put into a savings plan, 
when the average woman is making less than $23,000, and when 
she is making 74 percent of her male counterpart, for African-
American women the figure is 64 percent, and for Hispanic women 
the figure is 53 percent--53 cents compared to the dollar of 
her male counterpart. So for these women to plan for retirement 
is a particular burden when they are faced with the same 
pressures of inflation and family support but at a much lower 
level of compensation; we really need to address those overall 
issues because they're exacerbated when they get extrapolated 
over a career of lifetime earnings at a lower rate that is 
truly not equitable. That's what's making us the leader 
worldwide of elderly women living in poverty, for example.
    Mrs. Thurman. Madam Chairwoman, if I could just ask another 
real quick question here--Mr. Callahan, in your testimony, you 
talk about the unreasonable PBGC insurance premiums. This is 
all kind of new to me. So I'm just trying to learn this along 
with probably other people as well. You say that if they buy 
into this, that it's going to cost them a lot more. I was under 
the impression that there was a set premium per employee. Help 
me here.
    Mr. Callahan. There's a risk premium. There's a set premium 
per employee under the current rules of $19 per participant.
    Mrs. Thurman. Right.
    Mr. Callahan. But if a plan is under----
    Mrs. Thurman. Per year?
    Mr. Callahan. Per year. If a plan is underfunded, there's 
an additional risk premium, and that risk premium can vary 
significantly. So you can have very, very significant risk 
premiums if your plan is underfunded. So if they've promised 
benefits or if the assets perform poorly, if they promise 
benefits they haven't been funding, that additional amount can 
be significant.
    If you establish a plan today and you want to grant credit 
past service, under existing rules, you're going to be 
underfunded for that past service that you've granted, and 
that's why you set the plan up today on a defined benefit 
basis. That's going to cause a risk premium; it's going to be a 
barrier for you to start such a plan.
    Mrs. Thurman. Can you give me an idea of how much we're 
talking about in this?
    Mr. Callahan. It could easily rise to $50 per participant.
    Mrs. Thurman. For a long period of time or just during the 
catchup period or----
    Mr. Callahan. It could be--a business lifetime is really 3 
years. It's certainly going to be over a period of 3 years. 
It's usually been lasting somewhere in the neighborhood of 4, 
5, or 6 years. It's continued to last. It doesn't go away.
    As those plans become funded, as those plans reach new 
levels, and the interest rates go up a little bit, there will 
be a little bit of arbitrage there that will help us out, but 
the premium is going to be pretty substantial. You wouldn't 
want to establish a brandnew plan today with any past service 
grants. You'd really have to think about that an awful lot, 
because if you did that without having the ability to fund it 
on an ongoing basis, your PBGC premiums would be pretty 
substantial.
    Mrs. Thurman. Well, Madam Chairwoman, I've got to tell you, 
I'm probably going to walk away from this hearing today with 
more questions than I care to come with, I've got to tell you. 
So, hopefully, with your testimony rose a lot of other 
questions about some other things. If you get a chance, come 
by; I need to sit down and talk to you. [Laughter.]
    Mrs. Johnson of Connecticut. Thank you. I'm going to 
recognize my colleague, Earl Pommeroy, who is one of the 
Congress' real experts on the pension issue, and we welcome him 
to sitting in on our Subcommittee, and we're happy to have him 
question. After that, we are going to recess. We have a vote on 
the journal and two 5-minute votes. So there will be about a 
15-minute recess before we hear from Mr. Scanlon, our last 
witness.
    Mr. Pomeroy. Madam Chair, I thank you very much for 
allowing me to attend today and ask a question. I want to 
congratulate you for cosponsoring the SAFE legislation, being 
the driving force behind promoting its passage on the Hill, and 
thank you for holding this hearing.
    Panel, this has been simply the best discussion about 
defined benefit plans in small employers that I have heard as a 
Member of Congress. I think that points out something. We 
really, as a Congress, haven't dealt in any way with the shift 
from defined benefit to defined contribution retirement plans, 
and the many consequences that it presents.
    Mr. Moore, I would ask you, as spokesperson of the Pension 
Rights Center, for the worker, do you think there is still much 
to commend the defined benefit format, even though it is 
looking, especially in the small employer sector, like it's a 
dinosaur about to vanish from the face of the Earth?
    Mr. Moore. There is under the SAFE and some of the 
provisions of the SMART proposal, and some of the provisions 
that are being entertained on the Hill right now--I believe so. 
The ultimate thing that any employee is looking for is 
security, and that's something that the defined benefit plans 
provide par excellence.
    It's also looking at employer contributions. If you don't 
have enough money to set aside for a plan, you know that 
someone is setting it aside for you, and that's a major plus of 
any sort of defined benefit plan, the employer contribution. 
So, yes, I believe that defined benefit plans have much to 
offer. I believe, particularly the way the SAFE and the SMART 
plans are, historically, the people who have been omitted are 
the small business employees, and this legislation targets them 
specifically. It gives them the opportunity to join in the 
benefits that some other people at larger corporations have. 
You look at the people who have some of the best pension 
benefits in this country. Their working at large employers, 
like GE or GEM, Monsanto, and now you're giving them the 
opportunity to get a crack at that, too. And I think it's 
excellent legislation, and I think it's a great opportunity for 
those people to enjoy the benefits of defined benefits.
    Mr. Pomeroy. Thank you, Mr. Moore.
    I think Mr. Fradette, in particular--am I pronouncing your 
name correctly--is exhibit A in terms of what we're after, a 
small employer with personal retirement needs, but also 
recognizing the retirement needs of your small business work 
force, wanting to bring a defined benefit plan online, but not 
really able to under the existing lay of the land. In fact, we 
see that in employers under 20, defined benefit plans cover 
about 6 percent of the workers in that category. I represent 
the State of North Dakota, where most of the employers are in 
that category. So there's an awful lot of upside growth we can 
have there.
    Does the SAFE design offer you something that you think 
would meet the needs of your agency?
    Mr. Fredette. Yes, it does. I'm the pension amateur, if you 
will, the consumer here. But I do know what we need. No. 1, as 
a small business, we're in the business of staying in business, 
and right now unemployment is at an alltime low, which means 
that I want to hold onto the people I've got. They're very good 
people. We want to grow. We want to hire some new people. I 
want to be able to attract very good people, top-flight people. 
So I need a pension plan, and I've heard all kinds of names 
tossed out--SIMPLE, SMART, SAFE. I need a real plan----
[Laughter.]
    Mr. Fradette [continuing]. One that, No. 1, it's got to be 
affordable. No. 2, it's got to be flexible. I like that feature 
about being able to make up for lost time. And the acronym is 
fitting. It's got to be safe. I will sit here and promise you 
that I won't stick my hand in the employee pension cookie jar 
and I will make sure that I put the contribution into the 
cookie jar that I said I would. But that's just me. You've got 
to make it safe and reliable for all employees who are going to 
be counting on these retirement benefits.
    Mr. Pomeroy. Very well said. I look at the SMART proposal 
advanced by the administration as a conceptual endorsement of 
SAFE. They didn't get the details quite right, but in concept 
they identified the appropriateness of moving forward with an 
initiative to advance defined benefit plans in small employer 
settings. I think it's up to Congress to craft the details in 
the legislative process, and I would hope we do it much more 
along the lines of SAFE.
    Let me move to a dimension of distinction between the two 
plans. The administration is concerned that we offer a fairly 
rich incentive to high-paid employees in these small employer 
settings, usually the owner. They're concerned that we bring 
along low-paid employees into the defined benefit process as 
well, not just have this be something that would be attractive 
to sole proprietors, for example, who would not really bring 
any employees into the defined benefit coverage other than the 
wealthy businessowner.
    Mr. Callahan and Mr. Merolli--and this will be my final 
question--Mr. Leonard, do you have quick comments in terms of, 
will this sweep in, do you think, a number of employees to make 
it worthwhile?
    Mr. Callahan. The eligibility requirements state that you 
must earn $5,000 or more in 2 consecutive years, and be 
anticipated to have $5,000 or more the next year. This brings 
everybody in, including your part-time workers. A good number 
of part timers earn over $5,000.
    So, certainly, the coverage requirements are met by 
bringing in all employees. No exclusions are allowed.
    Second, the same level of benefits are being provided to 
the owners of the business as are provided to the rank and 
file. There are no differences; there are no permitted 
disparity that's allowed under existing rules. So even though 
as a percentage of pay, some of the rank and file may get 
larger retirement benefits because Social Security is slanted 
more toward those at a low-pay level, at ultimate retirement 
from the three-legged stool, the benefits that are provided 
from the employer and the incentive that we as a nation are 
providing to them are equal.
    Mr. Merolli. Mr. Callahan basically took the words right 
out of my mouth. I was going to say essentially the same thing. 
Any employee who earns over $5,000 is covered, whether or not 
they're employed on the last day of the year. If someone leaves 
during the year, as long as they've earned $5,000, if the 
employer chooses to fund the plan for that year, and makes a 1, 
2, or 3 percent, for example----
    Mr. Pomeroy. Based on your familiarity with the market, 
this will be of interest to more than just the sole proprietor 
or the person----
    Mr. Merolli. Oh, yes, very, very much so. I think it will 
be of interest not only to the sole proprietor, but I think it 
would be of interest to the area that we haven't hit yet, the 
small business, OK, the tiny fraction of--there's only a tiny 
fraction of small businesses that have adopted plans, for that 
very reason, and I think this is the kind of thing we need 
because it makes it attractive to those businesses, to the over 
80 percent of businesses under 25 lives that do not currently 
have a retirement plan.
    Mrs. Johnson of Connecticut. We're down to about 3\1/2\ 
minutes now. I'm going to have to thank the panel for your help 
and your good comments throughout all of this, and we look 
forward to returning for our final witness. Thank you.
    [Recess.]
    Mrs. Johnson of Connecticut. I'd like to reconvene the 
hearing.
    There are other colleagues that are particularly interested 
in your testimony, Mr. Scanlon. So I apologize for starting 
before they came, but I also have to leave. So when Mr. Kleczka 
gets here, we'll also kind of recap, or Mr. Coyne, but if we 
could start now, then we'll proceed when they get back, perhaps 
after you finish, go back and recap it. If you could start now, 
I'd appreciate it.

STATEMENT OF WILLIAM J. SCANLON, DIRECTOR, HEALTH FINANCING AND 
SYSTEMS ISSUES, HEALTH, EDUCATION, AND HUMAN SERVICES DIVISION, 
                 U.S. GENERAL ACCOUNTING OFFICE

    Mr. Scanlon. That's fine, Madam Chairwoman. I recognize 
fully the many demands on your time. So I'm happy to start.
    Mrs. Johnson of Connecticut. Well, I am very sorry that we 
had to slide the hearing 1 hour, and I don't know whether you 
heard my explanation, but I wouldn't have done it if there 
weren't good reason.
    Mr. Scanlon. Right.
    Mrs. Johnson of Connecticut. I appreciate----
    Mr. Scanlon. I understand.
    Mrs. Johnson of Connecticut [continuing]. Your cooperation 
in going so late in the evening.
    Mr. Scanlon. OK. Well, thank you very much. I'm pleased to 
be here today, as you and the Subcommittee have discussed the 
financial concerns that face America's retirees. My remarks 
today rely very heavily on a report that we provided on early 
retiree health care coverage last July for Representative 
Kleczka.
    [For additional information on the report referenced here, 
see Retiree Health Insurance: Erosion in Employer-Based Health 
Benefits for Early Retirees, GAO/HEHS-97-150, July 11, 1997.]
    Mr. Kleczka. Hello.
    Mr. Scanlon. As I was mentioning, my remarks are very much 
drawn from the report that we prepared for you last July. While 
today's oversight hearing has highlighted the importance of 
expanding pension coverage so that retirees are not forced to 
live on their Social Security benefits alone, many workers face 
another serious predicament, the lack of affordable health 
insurance if they retire before they become eligible for 
Medicare at age 65.
    As you're well aware, ERISA protects a worker's pension and 
health benefits, but only if the employer provides such fringe 
benefits. Thus, ERISA requires employers to fund their pension 
plans and gives workers vested rights upon meeting certain 
service requirements.
    Health benefits, on the other hand, were excluded from the 
funding and vesting requirements. In fact, employers commonly 
finance health benefits both for active and retired workers on 
a pay-as-you-go basis. This arrangement leaves workers 
particularly vulnerable to economic or other circumstances that 
might prompt an employer to reconsider the terms under which 
health coverage is provided.
    New accounting rules that became effective in 1993 and 
rapidly escalating health care costs are widely considered to 
have provoked such reassessments. If employer's have reserved 
the right to do so, nothing in Federal law prevents them from 
changing or eliminating retiree health coverage. In fact, an 
employer's freedom to make such changes is a defining 
characteristic of America's voluntary employer-based system of 
health insurance.
    Slowly, but persistently, large American companies have 
decided to terminate retiree health insurance. According to 
Foster-Higgins, a benefit consulting firm, fewer than half of 
the companies with 500 or more employees offer health coverage 
to early retirees, and that number has declined from 46 percent 
in 1993 to 38 percent today. A similar decline has occurred at 
firms that offer coverage to Medicare-eligible retirees.
    In addition to fewer employers offering retiree health 
benefits, a 1995 Labor Department study indicated that the 
likelihood of retirees enrolling in plans that are offered to 
them has also dropped because of the increased cost the 
companies are asking the retirees to shoulder.
    The erosion in employer-based retiree health insurance is 
particularly troublesome to older Americans approaching or at 
retirement age. First, they consume medical services at a much 
higher rate, and their health care is commensurately more 
expensive than that of younger Americans.
    Second, the alternatives to employer-based coverage are 
much more costly, at times to the point of being simply 
unaffordable, and not always available to everyone.
    The 1997 implementation of the Health Insurance Portability 
and Accountability Act, HIPAA, eliminated one potential 
obstacle for retirees who lose group coverage through a former 
employer, but HIPAA did not address the affordability issue.
    For eligible retirees, coverage can no longer be denied or 
restricted by a preexisting medical condition. HIPAA provides 
Federal standards to ensure that eligible individuals leaving 
employer-based group plans can purchase insurance on their own, 
if they can afford to do so. In most States, they will have 
access to the individual insurance market. However, because 
State laws governing the operation of individual markets 
differ, the premium faced by HIPAA-eligible early retirees 
varies considerably. Moreover, considering that large companies 
typically pay 70 to 80 percent of the premiums of workers, 
costs in the individual market may come as a rude awakening, 
since then is no one else to help share the expense for 
retirees.
    Had HIPAA been in effect in 1996, when the Co. terminated 
health insurance for 750 retirees, those affected would have 
been guaranteed coverage. They would have faced, though, a 
standard premium of almost $8,200 per year for comparable 
family coverage in the individual market, provided they did not 
smoke. It would have been $11,000 a year if they did smoke--a 
cost they would then absorb on their own.
    Premiums in other States can be higher or lower. Family 
coverage for a HIPAA-eligible early retiree would have been 
about $6,000 in Arizona, but nearly $12,000 in New Jersey. 
While New Jersey prevents carriers from increasing premiums due 
to health status, retirees in Arizona and Wisconsin both can be 
charged more than the standard premium if they had a 
preexisting health condition.
    Early evidence from the implementation of HIPAA suggests 
that the rates developed by insurance carriers for the HIPAA-
guaranteed products are substantially higher than the prices of 
standard products available in the individual market to those 
who are healthy. In addition, a number of States are using 
high-risk pools, which usually charge more than a standard 
policy premium, as the mechanism to guarantee coverage. As a 
result, these 1996 rates I quoted may understate the cost of 
HIPAA-guaranteed coverage available to persons in poor health 
in 1998.
    The right to elect COBRA continuation coverage from a 
former employer is available to some, but not all retirees. 
COBRA allows covered individuals, upon retirement, to continue 
employer-based coverage for 18 months if their company does not 
offer health benefits to retirees. COBRA is not available, 
however, to retirees whose employer unexpectedly terminates 
their health care coverage at some point after retirement. To 
address that coverage gap for such retirees, bills have been 
proposed by Members of Congress, as well as the President, to 
allow retirees to purchase continuation coverage at a cost that 
reflects their higher utilization of services until they become 
eligible for Medicare.
    In conclusion, let me note that the erosion in retiree 
health insurance has been persistent, despite an abatement, at 
least for the recent past, in health care inflation and the 
reemergence of a strong internationally competitive economy. 
This continued erosion raises a fundamental question about what 
protection will be available for retirees from employer-based 
insurance.
    That concludes my statement. I'd be happy to answer any 
questions you have.
    [The prepared statement follows:]

Statement of William J. Scanlon, Director, Health Financing and Systems 
Issues, Health, Education, and Human Services Division, U.S. General 
Accounting Office

    Madam Chairman and Members of the Subcommittee:
    We are pleased to be here today as you discuss issues 
related to pension benefits and retirement. As you know, forces 
in the U.S. labor market have been transforming the cash 
portion of retirement benefits, and these forces are impinging 
on retiree health benefits as well. Several factors suggest 
that retiree access to affordable health benefits is becoming 
an important national issue. These factors include the downward 
drift in employers' commitment to retiree coverage, the 
consideration of proposals to raise the Medicare eligibility 
age to 67, and the dramatic near-term increase in the number of 
retirees as millions of baby boomers approach retirement age.
    You asked us to comment on the erosion in employer-based 
health benefits for retirees, especially early retirees who 
leave the workforce before age 65, when Americans typically 
become eligible for Medicare. My comments are based on a recent 
report we prepared at the request of Representative Jerry 
Kleczka.\1\ His request was sparked by the Pabst Brewing 
Company's abrupt cancellation of health benefits for about 750 
retirees of its Milwaukee plant in late 1996. My statement 
today will focus on three issues: (1) trends in access to 
employer-sponsored retiree health benefits, (2) the impact on 
retirees of an employer's decision to terminate health 
benefits, and (3) federal safeguards that protect the rights of 
retirees who have health benefits.
---------------------------------------------------------------------------
    \1\ Retiree Health Insurance: Erosion in Employer-Based Health 
Benefits for Early Retirees (GAO/HEHS-97-150, July 11, 1997).
---------------------------------------------------------------------------
    To address these questions, we reviewed surveys that track 
the availability of employer-based health coverage, data from 
health insurance carriers on the cost of alternative sources of 
coverage for individuals whose employers unexpectedly terminate 
retiree health benefits, applicable federal and state laws and 
legal precedents, and our earlier work. (See the list of 
related GAO products at the end of this statement.)
    In summary, retiree access to and participation in private 
insurance through an employer has undergone a slow but 
persistent decline since the early 1990s. There are several 
explanations for this erosion in coverage. First, high and 
rising health care costs have spurred employers to look for 
ways to control their benefit expenditures, including 
eliminating retiree coverage and increasing cost sharing. 
According to the Labor Department, increased cost-sharing by 
retirees has contributed to fewer electing coverage when it is 
offered. Second, a new financial accounting standard developed 
in the late 1980s has changed employers' perceptions of retiree 
health benefits and may have acted as a catalyst for reductions 
in retiree coverage. The new rule makes employers much more 
aware of the future liability inherent in retiree health 
benefits by requiring them to account for its estimated value. 
By dropping retiree coverage, a company can immediately improve 
its balance sheet, making its stock more attractive to 
investors.
    Losing access to employer-based coverage poses major 
challenges for retirees. The 1997 implementation of the Health 
Insurance Portability and Accountability Act of 1996 (HIPAA) 
has eliminated one potential obstacle for retirees who lose 
group coverage through their former employer--the possibility 
that coverage in the individual market will be denied or 
restricted by a preexisting medical condition. HIPAA provides 
federal standards to ensure that eligible individuals leaving 
employer-based group plans can purchase insurance on their own 
if they can afford to do so. Because state laws governing the 
operation of the individual market differ, however, the 
premiums faced by early retirees vary substantially. Moreover, 
considering that large companies typically pay 70 to 80 percent 
of the premium, costs in the individual market may come as a 
rude awakening for early retirees. For example, had HIPAA been 
in effect in 1996, retirees trying to replace the benefits 
terminated by Pabst with comprehensive family coverage from a 
Wisconsin carrier would have faced an annual premium of almost 
$8,200--a cost that they would have had to absorb on their own. 
And, using 1996 rates again, family coverage for a HIPAA-
eligible early retiree would have been $6,246 in Arizona but 
$11,825 in New Jersey. While New Jersey restricts carriers' 
premium-rating practices and generally requires all carriers to 
set the same rate for all plan participants in a community, 
eligible retirees in Arizona and Wisconsin can be charged much 
more than the standard premium if they have a preexisting 
health condition. Early evidence from the implementation of 
HIPAA suggests that rates developed by insurance carriers for 
HIPAA guaranteed access products are substantially higher than 
the prices of standard products available in the individual 
market to those who are healthy. As a result, these 1996 rates 
may understate the cost of a HIPAA product purchased in 1998.
    A key characteristic of America's voluntary, employer-based 
system of health insurance is an employer's freedom to modify 
the conditions of coverage or to terminate benefits. When an 
employer has terminated retiree health benefits, federal courts 
have turned to the nature of the written agreements and other 
pertinent evidence covering the provision of retiree benefits 
to determine the legitimacy of the action. In essence, the 
issues before the court are often a matter of contract 
interpretation. If the employer explicitly reserved the right 
in plan documents to modify health benefits, the courts have 
generally upheld the termination of coverage. Individuals who 
are already retired when an employer terminates coverage are 
not eligible to temporarily continue that firm's health plan at 
their own expense.\2\ COBRA coverage is only available to 
active employees who quit or retire or are fired or laid off. 
To address the potential gap in coverage when a former employer 
unexpectedly terminates health insurance, Members of the 
Congress as well as the President have proposed allowing 
affected retirees to purchase continuation coverage at a cost 
that reflects their higher utilization of services until they 
become eligible for Medicare.
---------------------------------------------------------------------------
    \2\ Continuation coverage was mandated by the Consolidated Omnibus 
Budget Reconciliation Act of 1986 (COBRA), 29 U.S.C. 1161 et seq. For 
this reason, continuation coverage is known by the acronym COBRA.
---------------------------------------------------------------------------

                               Background

    Because of the cost, retiree health benefits are a concern 
to both employers and older Americans. Employers recognize that 
these benefits help to retain an experienced workforce but must 
also consider the cost of providing coverage. Older Americans 
approaching or at retirement age consume a higher level of 
medical services, and as a result, their health care is 
commensurately more expensive. For workers under age 65 and not 
yet eligible for Medicare, the decision to retire may turn on 
the continuation of health benefits by an employer. For those 
65 or older living on a fixed income, employer-based benefits 
may help fill coverage gaps in Medicare, such as deductibles 
and copayments or the lack of a prescription drug benefit.
    Overall, about one-third of retirees 55 and older received 
health benefits from a former employer in 1994. About 75 
percent were over age 65, and any employer-based coverage 
available to them supplemented their Medicare benefits; the 
remaining 25 percent of retirees were generally ineligible for 
Medicare because they were between ages 55 and 65. For the 
latter group, employer-based benefits were the primary source 
of coverage.
    Bureau of the Census data show that the number of retirees 
increased from 18.5 million to 23.4 million between 1988 and 
1994. However, the first members of the baby boom generation 
are now aged 52 and poised to enter retirement, an event that 
will begin to dramatically increase the number of retirees.

   Decline in Access to and Participation in Employer-Based Retiree 
                                Coverage

    Data from an annual survey conducted by Foster Higgins, a benefit 
consulting firm, suggest a significant decline between 1988 and 1996 in 
the availability of retiree coverage from large employers with over 500 
workers. Because of a change in the survey methodology, the pre-1993 
data should not be viewed as authoritative.\3\ However, the data from 
these two periods appear to be consistent. The data distinguish between 
early retirees and those who are Medicare-eligible. Since 1993, 
coverage for both groups has declined by 8 to 9 percentage points, a 
continuation of a trend evident since 1988. As shown by figure 1, early 
retirees are more likely than those who are Medicare-eligible to be 
offered health benefits by a former employer. In 1997, for example, 
only 31 percent of Medicare-eligible retirees were offered health 
benefits compared with 38 percent of early retirees.
---------------------------------------------------------------------------
    \3\ National Survey of Employer Sponsored Health Plans 1996 (New 
York: Foster Higgins, 1997). Although the Foster Higgins survey dates 
from 1986, the survey methodology was changed in 1993 so that the 
results could be representative of all U.S. employers rather than just 
those who responded.
[GRAPHIC] [TIFF OMITTED] T5945.016

    The two primary reasons cited for the decline in employer-based 
retiree health coverage are (1) new accounting standards, which 
highlight the magnitude of this liability over time, and (2) rapidly 
rising benefit costs. Since employers typically cover retiree health 
costs as they are incurred, the liability represented by a commitment 
to provide benefits to current and future retirees is largely unfunded. 
In 1990, the Financial Accounting Standards Board announced the 
introduction of a new rule, referred to as FAS 106, regarding these 
unfunded obligations. Beginning in 1993, employers were required to 
include the present value of future costs for retiree health benefits 
as a liability on their balance sheets. Many financial experts are 
concerned because these long-term liabilities erode equity positions 
and will become current obligations in future years.\4\ The new 
standard does not require that employers set aside funds to pay for 
these future costs, and thus it does not affect their cash flow. 
However, by dropping retiree coverage, a company can immediately 
improve its balance sheet, making its stock more attractive to 
potential investors. In responding to benefit consultant surveys, many 
companies cited FAS 106 as a reason for modifying retiree health 
benefits, including the phasing out of such coverage.
---------------------------------------------------------------------------
    \4\ For additional information on the impact of FAS 106, see 
Retiree Health Plans: Health Benefits Not Secure Under Employer-Based 
System (GAO/HRD-93-125, July 9, 1993).
---------------------------------------------------------------------------
    The late 1980s was a period of double-digit health care inflation. 
Although the growth in premiums has slowed dramatically in the past few 
years, the percentage of large firms offering retiree health benefits 
has continued to drop. Among the reasons cited by Foster Higgins for 
the slowdown in the growth of employers' health care costs are that 
more workers moved into managed care plans--including retirees--and the 
fact that some employers dropped retiree coverage.
    As shown in figure 1, employers are less likely to offer coverage 
to Medicare-eligible retirees than to early retirees. There are several 
potential explanations for this disparity. First, individuals are not 
as likely to seek early retirement if they cannot continue employer-
based health benefits. A RAND study of the effect of access to 
postretirement health insurance found that the offer of continued 
coverage made it more likely that men aged 55 to 62 would retire.\5\ 
Second, those who retired early through buyouts may have been 
guaranteed health benefits as an enticement to do so. Third, federally 
mandated COBRA coverage allows some individuals to retire at age 63-1/2 
and continue with employer-based group coverage until they become 
Medicare-eligible at age 65. Finally, employers know that coverage is 
available to retirees aged 65 and older through Medicare, an option not 
open to younger retirees. 
---------------------------------------------------------------------------
    \5\ Lynn Karoly and Jeannette Rugowski, The Effect of Access to 
Post-Retirement Health Insurance on the Decision to Retire Early, RAND 
Reprints: 94-13E (Santa Monica, Calif.: RAND, 1995).
---------------------------------------------------------------------------

         Coverage Influenced by Factors Other Than Availability

    The decline in the number of large employers that offer 
retiree coverage is corroborated by an analysis conducted by 
the Labor Department's Pension and Welfare Benefits 
Administration. The study, which examined Current Population 
Survey (CPS) data, revealed a significant erosion between 1988 
and 1994 in the number of individuals who retained employer-
based health coverage upon retirement.\6\ Only 42 percent of 
retirees aged 55 and older continued employer-based coverage 
into retirement in 1994, a decline of 8 percentage points since 
1988. Moreover, the percentage of individuals with employer-
based coverage continued to decrease throughout retirement. 
Thus, only 34 percent still retained coverage several years 
after retirement.
---------------------------------------------------------------------------
    \6\ U.S. Department of Labor, Pension and Welfare Benefits 
Administration, Retirement Benefits of American Workers: New Findings 
From the September 1994 Current Population Survey (Washington, D.C.: 
Department of Labor, Sept. 1995), p. 25.
---------------------------------------------------------------------------
    In addition to the availability of coverage, the Labor 
Department study suggests that cost is another factor 
contributing to the decline in retirees with employer-based 
insurance. Thus, the propensity for retirees to enroll in 
employer-based plans when they are offered has also dropped 
because of the increased costs retirees are being asked to 
shoulder by employers. In both the 1988 and 1994 surveys, 
individuals who declined employer-based coverage at retirement 
were asked the reasons for their decisions. Of the 
approximately 5.3 million retirees who discontinued employer-
based benefits in 1994, an estimated 27 percent cited the 
expense as a factor--an increase from 21 percent in the earlier 
survey. Moreover, there was a 6-percentage-point increase over 
the same time period in the number of such retirees who 
indicated that they still had health insurance through a plan 
other than that of their former employer. Thus, some retirees 
who find coverage from their own employer too expensive may 
have switched to plans with lower cost-sharing available 
through a working or retired spouse.
    Other sources of private insurance do appear to be filling 
a significant portion of the gap created by the fact that fewer 
employers offer retiree health benefits. We estimated that 
between 1989 and 1995, the percentage of early retirees with 
private coverage fell by only 7 percentage points, compared 
with a much larger drop in the number of employers offering 
retiree coverage.\7\ If employer-based coverage is not 
available, early retirees may postpone retirement, purchase 
coverage themselves, or obtain insurance through a working 
spouse.
---------------------------------------------------------------------------
    \7\ Our estimate is based on CPS data from the Bureau of the 
Census. See Private Health Insurance: Continued Erosion of Coverage 
Linked to Cost Pressures (GAO/HEHS-97-122, July 24, 1997).
---------------------------------------------------------------------------
    CPS data also contain insights on the characteristics of 
retirees more likely or less likely to have employer-based 
coverage. The characteristics for these two groups of retirees 
are summarized in table 1.

    Table 1: Characteristics of Retirees More and Less Likely to Have
                     Employer-Based Health Benefits
------------------------------------------------------------------------
       MORE likely to have coverage         LESS likely to have coverage
------------------------------------------------------------------------
Work for larger firms                       Work for smaller firms
Have higher preretirement earnings          Have lower preretirement
                                             earnings
Belong to union                             Are nonunion
Work in manufacturing or communications/    Work in retail sector or
 public utilities                            service industries
Work for public sector                      Work for private sector
Are men                                     Are women
Are white                                   Are black or other race
------------------------------------------------------------------------
 Source: Department of Labor, Pension and Welfare Benefits
  Administration, analysis of CPS data.


Employers' Decisions to Terminate Coverage Expose Retirees to New Costs 
                               and Risks

    If available, employer-based group health insurance 
provides two important advantages to retirees: (1) more 
affordable health benefits and (2) access to benefits for those 
retirees whose health status might otherwise impinge on their 
ability to obtain coverage in the individual insurance market. 
Such insurance is affordable because many employers continue to 
finance all or a significant amount of their retirees' health 
insurance premiums, even though over the last decade retirees 
have been required to pay an increasing share of these costs. 
In addition, the overall premiums for employer-based health 
plans are generally lower than those in the individual 
insurance market because the premiums that insurers charge 
employers are based on risks spread over an entire group of 
workers. In contrast, premiums in the individual insurance 
market reflect the risk characteristics of each applicant. 
These characteristics include not only age but also gender, 
health status, geographic differences in health care costs, and 
family size.\8\ Unless there is a state law prohibiting price 
differences by age, most carriers charge higher premiums to 
older applicants.
---------------------------------------------------------------------------
    \8\ For details on the individual health insurance market, 
including its structure, premium prices, the effect of demographic 
characteristics, and health plans offered, see Private Health 
Insurance: Millions Relying on Individual Market Face Cost and Coverage 
Trade-Offs (GAO/HEHS-97-8, Nov. 25, 1996).
---------------------------------------------------------------------------
    Before the July 1, 1997, implementation of HIPAA, 
consumers, including retirees entering the individual insurance 
market, often discovered that they were not eligible for 
insurance or that their coverage was conditioned upon the 
permanent exclusion from the policy of an existing health 
problem. Many with specific health problems found coverage only 
at prohibitive prices. For example, health insurance carriers 
often declined coverage for acquired immunodeficiency syndrome 
(AIDS) and diabetes; offered coverage but excluded conditions 
such as asthma, ulcers, and glaucoma; and charged higher 
premiums for plans that covered problems like anemia and 
arteriosclerosis.\9\ HIPAA guarantees access to the individual 
market by eligible individuals with qualifying coverage from a 
former employer--regardless of their health status--and also 
provides for the renewability of individual coverage.\10\ This 
guaranteed access is often referred to as ``portability.'' 
However, HIPAA offers no protection to Pabst retirees whose 
health benefits were terminated in 1996 or to any retiree who 
lost employer-based health benefits before its July 1, 1997, 
implementation date.\11\
---------------------------------------------------------------------------
    \9\ See GAO/HEHS-97-8, Nov. 25, 1996, for a discussion of the 
evaluation process that health insurance companies have used in 
providing access to the individual insurance market.
    \10\ HIPAA only guarantees access to the individual market to 
eligible individuals leaving group coverage. Thus, someone living in 
Arizona who wanted to purchase individual coverage but did not qualify 
under HIPAA could still be denied an individual policy because of a 
preexisting health condition.
    \11\ Wisconsin law requires insurers to accept individual 
applicants who previously had employer-based insurance if such 
insurance is not self-funded, but it does not apply to Pabst retirees 
because the firm self-funded its health benefits. Self-funded plans are 
those in which employers bear much of the financial risk for health 
claims. Employers that self-fund are not subject to state insurance 
regulation.
---------------------------------------------------------------------------
    Although HIPAA guarantees access to the individual market, 
it does not address the cost of coverage. Retirees no longer 
covered by their former employer's group health plan are likely 
to pay higher premiums for similar coverage in the individual 
insurance market. And with the loss of employer-based coverage, 
affected retirees who want to purchase health insurance must 
now absorb its full cost, which can be significant. Thus, had 
HIPAA been in effect in 1996, a Milwaukee retiree who wanted to 
replace the benefits terminated by Pabst would have paid $8,187 
for a standard family plan with a $250 deductible.\12\ Since 
Wisconsin does not restrict the underwriting practices of 
carriers, a carrier may choose to charge an unhealthy 
individual more. Before its decision to terminate health 
benefits to retired employees at its Milwaukee plant, Pabst 
financed the total cost of practically all of the health plans 
it offered to retired workers. Given the substantial geographic 
variability of health insurance rates in the individual market, 
HIPAA-eligible retirees will be affected differently. For 
example, in 1996, a major carrier in New Jersey offered family 
coverage with a $250 deductible at an annual price of 
$11,825.\13\ The price of similar family coverage in Maricopa 
County, Arizona, was only $6,264 in 1996. However, as in 
Wisconsin, HIPAA-eligible retirees in Arizona with preexisting 
conditions can be charged a premium much higher than the 
standard.
---------------------------------------------------------------------------
    \12\ Family coverage is for a retiree and spouse. The rate is for 
an individual who does not smoke. A retiree who smokes would pay about 
$11,000 for family coverage.
    \13\ This amount is for nonsmokers aged 55 to 59 with one child. 
Moreover, New Jersey restricts carriers' premium rating practices and 
generally requires all carriers to set the same rate for all plan 
participants within a community.
---------------------------------------------------------------------------
    These 1996 rates may understate the actual cost of a HIPAA 
guaranteed access product purchased today. Thus, in September 
1997 correspondence to the Chairman of the Senate Labor and 
Human Resources Committee on early HIPAA implementation 
concerns, we reported that (1) premiums for some HIPAA products 
may be substantially higher than for standard products 
available to healthy individuals and (2) the way many carriers 
will determine future premium rates for portability products 
may lead to even higher rates. Some carriers permit HIPAA 
eligibles to apply for both a HIPAA product and a lower-cost 
standard product. Since healthy individuals are likely to 
enroll in the less expensive option, only unhealthy individuals 
would be enrolled in the HIPAA product--a practice that could 
result in an increasing spiral of poorer risks and higher 
premiums.
    States were allowed to choose a number of approaches to 
meet HIPAA's portability requirements. Thus, 22 states elected 
to use their high-risk pools to provide guaranteed access to 
the individual market for qualified individuals leaving group 
coverage. Prior to the enactment of HIPAA, many states had 
high-risk pools for those who had been denied coverage or had 
one of a number of specified health conditions. However, this 
safety net option often has very limited coverage and lower 
lifetime limits. The cost of a high-risk pool can be 50 percent 
more than the average or standard rate charged in the 
individual insurance market for a comparable plan. For example, 
the annual premium for a single male aged 50 to 55 in 
Wisconsin's high-risk pool averaged $5,122 in 1996--over $500 
more than the cost in the individual insurance market. 
Wisconsin offers subsidies to families with incomes of less 
than $20,000. 

  Limited Federal Protection of Employer-Based Retiree Health Benefits

    The Employee Retirement and Income Security Act (ERISA) 
protects both the pension and health benefits of workers. It 
does not, however, mandate that employers offer such benefits. 
ERISA requires employers to fund their pension plans and gives 
employees vested rights upon meeting certain service 
requirements; health benefits, on the other hand, were excluded 
from such funding and vesting requirements. In fact, employer-
based health benefits for both active and retired workers are 
commonly funded on a pay-as-you-go basis.
    Nothing in federal law prevents an employer from cutting or 
eliminating health benefits. In fact, an employer's freedom to 
modify the conditions of coverage or to terminate health 
coverage is a defining characteristic of America's voluntary, 
employer-based system of health insurance.\14\ While ERISA 
protects the pension benefits of retired workers, it offers 
only limited federal safeguards to retirees participating in a 
firm's health benefit plan. ERISA requires companies to make a 
summary plan description (SPD) available to health plan 
participants within 90 days of enrolling. For retirees, the SPD 
that is in effect at the time of retirement is the controlling 
document. The SPD must clearly set out employee rights, 
including ``information concerning the provisions of the plan 
which govern the circumstances under which the plan may be 
terminated.'' Employers must file these documents with the 
Department of Labor, the agency responsible for enforcing 
ERISA. According to Labor, unless employers have made a clear 
promise of specific health benefits for a definite period of 
time or for life and have not reserved the right to change 
those benefits, they are free to cut or terminate health care 
coverage.
---------------------------------------------------------------------------
    \14\ The decline of traditional fee-for-service indemnity coverage 
and the growth in managed care enrollment exemplifies the ability of 
employers to modify their health benefit programs. Between 1987 and 
1996, employer-based managed care enrollment rose from 27 percent to 74 
percent as employers (1) altered the type and mix of health plans 
offered, sometimes eliminating the traditional fee-for-service 
indemnity option; (2) changed employee financial incentives; and (3) 
used the information provided to employees to influence their selection 
of health plans. See Health Insurance: Management Strategies Used by 
Large Employers to Control Costs (GAO/HEHS-97-71, May 6, 1997) for a 
discussion of the flexibility of large employers as well as the 
constraints they face in modifying their health benefit purchasing 
strategies.
---------------------------------------------------------------------------
    Because federal law preempts state regulation of pension 
and health benefits, the rights of active and retired employees 
under ERISA are determined in federal courts. In reviewing 
cases involving changes to health benefit plans by employers, 
several federal courts have focused on the actual language used 
in plan documents and, if applicable, in collective bargaining 
agreements. Virtually all employers have reserved the right to 
modify health benefits for current and future retirees in such 
documents. However, if the language leaves some doubt as to the 
nature or duration of benefits, or if there are conflicts in 
the plan documents, the courts have examined significant 
written and oral representations made to employees to determine 
whether the employer has the right to modify retiree health 
benefits.
    One ERISA protection--the right to elect COBRA coverage 
from a former employer if a worker is fired, laid off, or 
leaves a job--is available to some but not all retirees. Thus, 
COBRA allows covered individuals, upon retirement, to continue 
employer-based coverage for 18 months if their company does not 
offer health benefits to retirees.\15\ Those eligible for COBRA 
coverage may have to pay the entire premium plus an additional 
2 percent. For many individuals, the high cost of COBRA 
coverage is a shock because under employer-based coverage, 
large companies typically pay 70 to 80 percent of the premium. 
COBRA is not available, however, to retirees whose employer 
unexpectedly terminates their health care coverage at some 
point after retirement. To address the coverage gap for such 
retirees, Members of the Congress as well as the President have 
proposed allowing affected retirees to purchase continuation 
coverage at a cost that reflects their higher utilization of 
services until they become eligible for Medicare.
---------------------------------------------------------------------------
    \15\ COBRA only covers firms with 20 or more employees who offer 
health benefits to active workers.
---------------------------------------------------------------------------
    Madam Chairman, this concludes my statement. I will be 
happy to answer your questions.

                          Related GAO Products

    The Health Insurance Portability and Accountability Act of 1996: 
Early Implementation Concerns (GAO/HEHS-97-200R, Sept. 2, 1997).
    Private Health Insurance: Continued Erosion in Coverage Linked to 
Cost Pressures (GAO/HEHS-97-122, July 24, 1997).
    Retiree Health Insurance: Erosion in Employer-Based Health Benefits 
for Early Retirees (GAO/HEHS-97-150, July 11, 1997).
    Health Insurance: Management Strategies Used by Large Employers to 
Control Costs (GAO/HEHS-97-71, May 6, 1997). 
    Private Health Insurance: Millions Relying on Individual Market 
Face Cost and Coverage Trade-Offs (GAO/HEHS-97-8, Nov. 25, 1996).
    Employer-Based Health Plans: Issues, Trends, and Challenges Posed 
by ERISA (GAO/HEHS-95-167, July 25, 1995).
    Retiree Health Plans: Health Benefits Not Secure Under Employer-
Based System (GAO/HRD-93-125, July 9, 1993).
      

                                


    Mrs. Johnson of Connecticut. Thank you very much, Mr. 
Scanlon.
    Are you aware of any information as to what it would cost 
retirees to be allowed to--early retirees--to be allowed to 
participate in COBRA? Are you familiar with any studies as to 
what the problems would be if we looked at that solution?
    Mr. Scanlon. I don't have the specific information about 
what the differential might be for early retirees, the cost of 
care for early retirees versus other workers. However, it's 
something that we could look into for you and get you some of 
that information. Clearly, as older individuals, these people 
have higher expenses, and one of the questions might be as to 
how much you asked or allowed them to remain within the group 
and to enjoy the benefits of group coverage in a single----
    Mrs. Johnson of Connecticut. For instance, if the employees 
of Pabst had been allowed to exercise COBRA rights, what would 
it have cost them as opposed to the $8,000? That is the figure?
    Mr. Scanlon. Well, $8,000 was the----
    Mrs. Johnson of Connecticut. Excuse me. The $8,000 was the 
individual market, correct?
    Mr. Scanlon. The individual market, right.
    Mrs. Johnson of Connecticut. And if they had been able to 
exercise a COBRA right, what would it have cost them?
    Mr. Scanlon. It would have depended upon the premium for 
the Pabst coverage, which generally would be about half the 
level of the individual market. Now, again, there may be an 
issue of whether it's fair to the younger Pabst workers to 
allow the older retirees to receive coverage at the average 
premium, or whether or not there should be a surcharge for the 
fact that this is a more expensive population.
    Mrs. Johnson of Connecticut. But, in general, it would be 
about half of the individual market, the COBRA part?
    Mr. Scanlon. Right, but there's a lot of variation in both 
individual rates and group rates, but, very often it's about 
half.
    Mrs. Johnson of Connecticut. And are you familiar with any 
studies that look at allowing Medicare eligibles to come back 
into Medicare, if their retiree plan expires or is terminated, 
and just pay the regular Medicare benefit?
    Mr. Scanlon. No, I'm not.
    Mrs. Johnson of Connecticut. Because, in a sense, the 
government hasn't been caring for them. So we have gotten a 
good deal, say, if they're covered the first 10 years of their 
retirement by their employers' plan. So to let them, then, sign 
up at whatever the average Medicare premium is at that time, or 
the appropriate Medicare premium at that time, seems to me a 
good deal for the government and a good deal for them.
    Mr. Scanlon. I'm not aware of studies that have looked at 
companies that have maintained full coverage. I do know that 
many companies coordinate their benefits, so that as an 
individual becomes eligible for Medicare, they do enroll in the 
program, and then the employer's obligation will decline, and 
there may be quite a generous Medigap policy, basically, that 
one is getting from their employer.
    Mrs. Johnson of Connecticut. Thank you.
    Mr. Kleczka.
    Mr. Kleczka. Thank you, Madam Chair. First of all, let me 
thank the chairwoman for permitting GAO and Mr. Scanlon to 
appear before the Subcommittee today to share with us a report 
that was compiled at my request, and it was a report that had 
its roots in the Pabst situation, as Mr. Scanlon has pointed 
out.
    I think what the report does indicate is a very, very 
disturbing trend in this country, wherein for this employee 
group we're seeing a rapid decline of employer sponsored health 
insurance. I think that has given rise to legislation not only 
introduced by myself, but clearly pushed by the administration, 
to provide some type of a vehicle for this segment of our 
society, be it an early retiree at age 55, whose company 
previously covered him or her, and then withdrew the coverage, 
like Pabst, or an employee who has been laid off permanently 
from his company; the company has closed, so that naturally 
would close off any COBRA option.
    And the administration is proposing a buy in to the 
Medicare Program. For those 55 to 62, it would be a buy in at 
100 percent of the cost. At 62 to 65, provided would be a 
premium with some subsidy, which would be recouped after age 
65.
    I think those two items by the President in his bill, and 
the third being comparable to mine, which is the buy in for 
COBRA, are just totally essential if we are going to provide 
some modus of coverage for this population within our society.
    My question, Mr. Scanlon, would be as follows: Do you think 
the legislative proposals I just mentioned could be the impetus 
for employers to cancel employee health coverage and exacerbate 
the problem that we're seeing. The rationale the employer could 
use is, well, gosh, the government provides coverage; why 
should we? Do you see that as being one of the effects, if in 
fact Congress, in its wisdom, would move ahead on one of these 
proposals?
    Mr. Scanlon. There may be some occurrence of that in what 
we do notice, in terms of how employers are providing retiree 
coverage today. There is greater generosity for early retirees 
than there is for retirees that are eligible for Medicare. And 
it's speculation, but one of the hypotheses that's suggested is 
that employers recognize that retirees under the age of 65 face 
very difficult insurance choices because of the portability 
issue, and that people over 65 don't. If there was public 
support for more affordable coverage for younger persons, maybe 
some employers would opt to do that.
    How strongly that there would be that kind of a response is 
impossible to say.
    Mr. Kleczka. And, clearly the States that have gone into 
the risk premiums, like the State of Wisconsin, is clearly not 
the answer with average or little means. I think you pointed 
out the premium base for the State of Wisconsin for somebody 
who was in a risk pool; it's very, very expensive coverage. To 
think somebody who took early retirement, to think that that 
person might have the expendable resources to buy a $6,000 or 
$8,000 health plan is truly not the case. Those people 
eventually will go bare, will go without, and after one or two 
serious health care problems, they're going to be on the 
government program called Title 19 at some point, should they 
expend their assets to that level.
    It seems to me that when we talk about retiree health care, 
for those employees in a bargaining unit that are represented, 
those benefits were not given to them by the grace of God or 
the generosity of the employer. Many of them gave up other 
benefits throughout their working years, be it pay increases or 
whatever, and it seems to me that for those situations we 
should expand the Pension Guarantee Corporation to provide some 
guarantee for those types of benefits also.
    I asked the Director of the PBGC. He's going to get back to 
me, but have you any thoughts on that particular expansion of 
the current PBGC law?
    Mr. Scanlon. Well, I heard your question earlier, and I 
think it triggered a number of thoughts. I thought as a 
potential early retiree that I would be very reassured by this 
kind of a guarantee. However, as an analyst, what I started to 
think about was exactly what this guarantee would provide, and 
how you would structure the health insurance benefit that 
employers would be offering and that their contribution to the 
PBGC would guarantee.
    One of the difficulties that we have in the health care, 
and one of the things that has put pressure on employers, is 
the fact that we have been very poor at controlling inflation. 
So that with a guarantee over a long period of time, we run the 
risk that we haven't in some respects saved enough to be able 
to fulfill that guarantee.
    So I think that the idea is intriguing. It may be most 
beneficial for some type of guaranteed coverage for early 
retirees, where you're talking about a fixed period of time, 
and it may also involve some switching from the concept of 
providing a defined benefit insurance plan, where you're 
guaranteeing people coverage to certain services, to a defined 
contribution, where you're going to empower them to be able to 
purchase insurance. But they may have to supplement it more if 
health inflation is so great that it outstrips the guarantee. 
In either case, they would be better off than they are 
currently.
    Mr. Kleczka. They surely would. We've seen a decline of 46 
percent to 38 over a period of 5 years. Do you forecast or do 
you see that this decline is going to continue or have we 
leveled off, or where are we?
    Mr. Scanlon. This is a relatively new phenomenon. So it's 
hard to be very confident that we are talking about a trend. 
What's disturbing about it is that we are seeing the decline 
continue even though we have a very, very strong economy right 
now, and even though we've brought health care costs sort of 
under control for the moment.
    If you look back to the 1992-93 period, when the accounting 
standard changes were introduced, you saw a very dramatic drop, 
and you can very easily tie that to the accounting standards. 
Then you could also think about health inflation, and that sort 
of exacerbated the situation. If you ask yourself today, why is 
it continuing, the situation suggests that it may continue for 
the short term at least.
    Mr. Kleczka. Let's just return back to the health 
inflation. Has it not been retarded over the years? I know when 
we talked about the national health care bill in 1993, health 
care inflation was very moderate for that year and the next 
year. When the bill was moved off the front burner, we saw some 
moderate growth, but then we have the HMOs, health maintenance 
organizations, and the PPOs, preferred provider organizations, 
and the managed health care plans come in. What is the current 
health care inflation rate for, let's say, the last year?
    Mr. Scanlon. I don't know the exact rate, but, basically, 
we have been very happy that we have one of the lowest rates 
that we've had in a very, very long time. We're starting to 
approach the point that health care inflation is almost equal 
to ordinary inflation, and as you know, ordinary inflation is 
relatively low these days. So we have succeeded. Since 1993-
1994, we've seen a dramatic change and the rate of health 
inflation has gone way down.
    Mr. Kleczka. So health care costs can't be the culprit in 
these employers' denying. Definitely the accounting rule change 
was----
    Mr. Scanlon. Right, right.
    Mr. Kleczka [continuing]. And we did look into that some 
time ago.
    Mr. Scanlon. Right. And, historically, while costs may have 
been a culprit, they should be much less of a culprit today.
    Mr. Kleczka. But I think we're going to see this trend 
continue, as you estimate at this point.
    Well, thank you very much for appearing, Mr. Scanlon. I 
think your report and your testimony indicate that there's a 
serious problem in this country for those retirees, early and 
at 55, and those retirees at age 62, when it comes to their 
health insurance cost. Medicare does not pick them up to 65 
years old.
    Last year there was a proposal in the Senate to expand or 
to lift that age requirement to 67, and it seems that what is 
going to happen to these people age 55 to, say, 65--there's a 
10-year gap there, and if they're going to go out to the 
private market and start paying $6,000 to $8,000 per year for 
coverage, clearly, they're not going to survive. There have to 
be some other arrangements.
    So I think your report, in my estimation, will help when 
the President's proposal comes up to expand the buy in to 
Medicare and/or my legislation, which would just expand COBRA.
    So thank you very much for appearing today.
    Mr. Scanlon Thank you.
    Mr. Kleczka [presiding]. Thank you.
    Since I've been given the gavel, and I'm in the Minority 
party, we have other witnesses outside that we're going to 
call. [Laughter.]
    CNN is coming with cameras. We've got a real show. 
[Laughter.]
    But, seriously, that is all the business to come before the 
Subcommittee. The Subcommittee does now adjourn.
    [Whereupon, at 6:01 p.m., the hearing was adjourned, 
subject to the call of the Chair.]
    [Submissions for the record follow:]

Statement of Hon. Roy Blunt, a Representative in Congress from the 
State of Missouri

    As a member concerned with retirement income security, I am 
filing this statement to compliment the subcommittee on its 
long standing interest in this issue and to suggest a proposal 
for your consideration.
    Although ERISA was enacted to enhance retirement benefit 
security, current data suggests that it is not working for all 
Americans. Indeed, as the Treasury Department recently 
reported, over half of all American workers lack coverage by a 
private pension plan. That gap is not evenly distributed among 
all employees, but is concentrated among those who work for 
small employers. Only 20 percent of workers in firms with fewer 
than 100 employees have pension coverage.
    Recent efforts, including the SIMPLE plan adopted in 1996 
and the SMART plan and payroll deduction IRAs included in the 
President's FY 99 Budget proposal, approach this problem with 
design-based retirement plans that provide guaranteed minimum 
benefits for all employees who meet certain minimum service 
requirements. To encourage adoption, these arrangements are 
exempt from certain of the most burdensome administrative 
requirements. However, benefits provided under these 
arrangements are very limited (annual employee contributions 
under the SIMPLE plan are limited to $6,000 with matching 
contributions capped at 3% of the employee's compensation, and 
annual benefit accruals under the SMART plan would be limited). 
Thus, we currently maintain a two tier system, comprised of:
     qualified plans which are permitted to provide 
significant retirement benefits (i.e., annual contributions of 
up to $30,000 under a defined contribution arrangement, and 
annual benefits of up to $125,000 (for 1998) payable under a 
defined benefit pension plan), but are subject to the full 
range of tax qualification requirements and ERISA reporting and 
disclosure rules; and
     special, design-based plans for certain small 
employers under which reduced administrative burdens buy 
significantly reduced benefit opportunities.
    Similarly, the SAFE proposal, developed by Chairman Johnson 
and members of the subcommittee is a defined benefit plan that 
would limit benefit accruals to a maximum of 3% of 
compensation, and would require the plan to be funded with 
annuities.

                      Additional Relief is Needed

    Unfortunately, these are often not viable options for the 
small employer who is willing to provide more generous benefits 
for its employees if plan costs consist primarily of funding 
benefits instead of unnecessary administrative expenses. Thus, 
while I support enactment of a payroll deduction IRA and a 
simplified defined benefit plan, I have been working with 
others to develop a hybrid approach, applicable to small 
employers.
    As described below, the bill I plan to introduce will, 
effective for years after enactment, create a new design-based 
plan permitting eligible small employers who agree to provide 
significant benefits to all employees to sponsor a hybrid 
defined contribution plan providing full benefits; provide a 
uniform definition of eligible small employers; simplify the 
eligibility requirements applicable to all small employer 
plans; repeal the ``top heavy'' rules; permit plans to use a 
uniform definition of compensation for purposes of plan 
qualification and calculating permitted deductions; simplify 
annual reporting requirements; and provide a tax credit for 
certain start-up expenses. Each of these provisions is 
discussed below in detail.

                           Design-Based Plan

    My bill creates a new, simplified design-based plan for 
small employers. Unlike prior simplified plans (e.g., SEPs, 
SARSEPS, SIMPLE and the proposed SMART plan) this proposal 
would permit small employers to provide the same level of 
benefits permitted under qualified defined contribution plans 
(i.e., annual contributions equal to the lesser of a specified 
dollar amount ($30,000 for 1998) or 25 percent of compensation) 
to their employees.
    In exchange for the employer's agreement to provide 100 
percent coverage, accelerated vesting, minimum non-integrated 
benefits, and to accept limitations on investments in employer 
securities, the eligible small employer would be permitted to 
provide these benefits under a single plan that combines the 
features of a present law money purchase pension plan and a 
discretionary contribution plan, thereby eliminating the need 
to adopt two plans with duplicate set-up, administration and 
compliance costs. The small employer retirement plan I propose 
will be treated as a new discretionary contribution plan that 
is not a profit-sharing, stock bonus or money purchase pension 
plan.

Small Employer Defined to Include Employers with 100 or Fewer Employees

    My proposal incorporates the most commonly accepted 
definition (used for purposes of the SIMPLE plan, the 
Administration's FY 99 Budget proposals for SMART plans and the 
proposed tax credit for plan start up costs) of a ``small 
employer'' as one with 100 or fewer employees. Administration 
data suggests that it is appropriate to target such employers 
because only 20 percent of employees in such firms currently 
participate in employer-sponsored retirement plans.
    The Administration's proposed SMART plan would not be 
available to a small employer that is also a ``professional 
service organization'' which would include organizations 
dedicated to health, law, engineering, architecture, 
accounting, actuarial services, performing arts or consulting. 
Given that the majority of employers with fewer than 100 
employees fall into one of these categories, excluding such 
employers from utilizing the simplified plans would exclude 
from plan coverage a large percentage of the employees targeted 
for coverage. Accordingly, my proposal will not include such 
restrictions.

                        Eligibility Safe Harbor

    Under my proposal, small employers who are willing to provide 
benefits for all employees who meet statutory minimum age and service 
requirements (thereby surrendering their flexibility to arbitrarily 
exclude 30 percent of such employees), would come under a safe harbor 
permitting (i) use of a single eligibility computation period--the plan 
year; and (ii) a single annual entry date--as of the first day of the 
plan year following the plan year in which the age and service 
requirements are satisfied.

                     Repeal the ``Top Heavy'' Rules

    In order to maintain qualified status, all retirement plans 
must satisfy certain requirements designed to ensure that the 
plan provides meaningful benefits to a nondiscriminatory group 
of employees. In addition, under current law, all qualified 
plans must comply in form and operation with special ``top-
heavy'' rules designed to protect non-key employees. Under 
these rules, a top-heavy plan must, among other things, 
implement accelerated vesting schedules and provide minimum 
benefits for non-key employees,.
    Since the top heavy rules were enacted in 1982, numerous 
changes have been made to plan qualification rules that render 
these restrictions virtually meaningless. For example, the Tax 
Reform Act of 1986 made substantial revisions to the 
nondiscrimination and Social Security integration rules, 
expanded the limit on pensionable compensation and accelerated 
vesting schedules for all plans (although not to the extent 
required for top heavy plans). The Small Business Jobs 
Protection Act repealed, effective for years after 2000, the 
combined plan limit applicable to all plans, including the 
restricted limit applicable to certain top heavy plans. And, 
the Administration's FY 99 Budget proposals would further 
accelerate vesting by applying the top heavy plan vesting 
schedules to all employer matching contributions made under 
401(k) plans. I believe these broader changes make the special 
top-heavy plan rules obsolete, which is why I propose to repeal 
these rules.

                   Uniform Definition of Compensation

    Under present law, tax-qualified retirement plans must use ``gross 
compensation'' (i.e., taxable compensation plus pre-tax salary 
deferrals) to determine whether the plan satisfies limitations on 
benefits and contributions and whether an employee's elective deferrals 
meet nondiscrimination rules. However, they must use ``net 
compensation'' (i.e., taxable compensation less the amount of any pre-
tax salary deferrals) to determine the deductibility of employer 
contributions to the plan. Because of the administrative costs 
associated with having different definitions of compensation for 
different purposes, my proposal would establish the use of ``gross 
compensation'' for all purposes.

        Simplified 5500 Filing Requirements for Small Employers

    Although efforts have been made to reduce unnecessary 
administrative burdens on small employers, (e.g. TRA 97 made it 
unnecessary to file Summary Plan Descriptions and Summaries of Material 
Modifications with the Department of Labor, and the FY 99 Budget 
Proposal would, at least for SMART plan sponsors, provide unspecified 
relief from burdensome filing requirements) more needs to be done. The 
breadth of relief must be expanded to apply, not only to SMART plan 
sponsors, but to all small employers that use standard documents. 
Specifically, I recommend that:
     plans in which the only participant is the employer (or 
the employer and spouse), that have at the end of the plan year plan 
assets of $500,000 (as opposed to $100,000) or less be exempt from 
filing Form 5500; and
     businesses with fewer than 25 employees on the first day 
of the plan year be permitted to file a form 5500EZ, even if additional 
employees are hired during the year, and regardless of the value of the 
plan assets.

                 Tax Credit for Certain Plan Start-ups

    Finally, it is a fact that regardless of what 
simplification measures are enacted, implementing a new 
retirement plan necessarily involves certain start-up costs. In 
recognition of this fact, the Administration's FY 99 Budget 
Proposal, effective beginning in the year of enactment, would 
provide a new tax credit for small employers who adopt a 
SIMPLE, a SMART, any other tax-qualified plan or salary 
deduction IRA on or before December 31, 2000. Applicable to 
small employers that did not maintain any retirement plan or 
payroll deduction IRA in 1997, the credit would be equal to 50 
percent of the administrative and retirement education expenses 
incurred in establishing the plan, capped at $2,000 for the 
first year, and $1,000 for the next two years. While I applaud 
this effort, I believe further relief is appropriate. 
Accordingly, I recommend that the credit be extended to cover 
at least the first five years of plan operation.

                               Conclusion

    I hope as you move forward with pension reform you will take 
seriously the proposals I have advanced and include the hybrid plan 
described above in your recommendations.
      

                                


Statement of Paul J. Yakoboski, Ph.D., Employee Benefit Research 
Institute \1\

                              Introduction

    As of 1993, the latest year for which nationally 
representative data are available, 64 percent of all civilian 
nonagricultural wage and salary workers worked for an employer 
that sponsored a retirement plan, and 49 percent of all workers 
participated in a retirement plan sponsored by their 
employer.\2\ Probably the most notable gap in employment-based 
retirement plan coverage is among small employers. While 85 
percent of workers at employers with 100 or more employees have 
an employer that sponsors a plan, only 50 percent of workers at 
employers with 25 to 99 workers, and 20 percent of workers at 
employers with fewer than 25 employees have an employer that 
sponsors a plan. The findings regarding participation are 
similar. Two-thirds of workers at employers with 100 or more 
employees actually participate in an employment-based 
retirement plan, compared with 36 percent of workers at 
employers with 25 to 99 workers and 15 percent of those at 
employers with fewer than 25 workers.
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    \1\ The views Expressed in this statement are solely those of the 
author and should not be attributed to the Employee Benefit Research 
Institute, or the EBRI Education and Research Fund, its officers, 
trustees, sponsors, or other staff, or to the EBRI-ERF American Savings 
Education Council. The Employee Benefit Research Institute is a 
nonprofit, nonpartisan, public policy research organization which does 
not lobby or take positions on legislative proposals.
    \2\ These figures are Employee Benefit Research Institute 
tabulations of the 1993 Current Population Survey employee benefits 
supplement.
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                              Why the Gap?

    Why do sponsorship rates and participation rates lag so 
much among small employers? EBRI first examined this issue 10 
years ago in a book entitled Pension Policy and Small 
Employers: At What Price Coverage? Chief among the reasons 
highlighted as to why small employers do not sponsor a 
retirement plan were financial cost/lack of affordability and 
the burden of administering a plan, with the latter often 
contributing to the former. Other factors cited were the lack 
of need for a plan and a preference among employees for cash 
compensation. Many employers noted that they had a high 
turnover work force and therefore their employees would not be 
interested in a plan with vesting requirements. They also felt 
that retirement income was at best a remote goal for the young 
workers who often make up their work force. Finally, small 
employers expressed a preference to reward performance 
selectively by paying bonuses. What developments would lead 
small employers to start a plan? The same research indicated 
that improved business profitability, increased tax advantages, 
and increased employee demand may lead small employers without 
a plan to start one.
    Coverage rates have remained basically unchanged among 
small employers over time. A list of likely reasons for not 
having a plan would look pretty much the same: cost/
administrative burden, low/uncertain profits, and lack of 
demand on the part of workers at small employers would likely 
lead the list. However, because of a lack of recent research in 
this area, EBRI, ASEC, and Mathew Greenwald and Associates have 
expanded the 1998 Retirement Confidence Survey project to 
include a survey of small businesses, both those with a 
retirement plan and those without one. The survey will explore 
the reasons that small employers do not offer a retirement plan 
and the changes that would lead them to consider doing so. 
Among small employers that do offer a retirement plan, the 
survey will explore the types of plans they offer and their 
motivations in offering these plans. Results should become 
available in May, and EBRI would be happy to share them with 
the committee when available.

                          Recent Developments

    The Small Business Job Protection Act of 1996 created a 
simplified retirement plan for small business called the 
savings incentive match plan for employees (SIMPLE). SIMPLE 
plans can be adopted by employers who employ 100 or fewer 
employees on any day during the year and who do not maintain 
another employment-based retirement plan.
    A SIMPLE plan can be either an individual retirement 
account (IRA) for each employee or part of a 401(k) plan. If 
established in IRA form, a SIMPLE plan is not subject to the 
nondiscrimination rules generally applicable to qualified plans 
(including the top-heavy rules), and simplified reporting 
requirements apply. Within limits, contributions to a SIMPLE 
plan are not taxable until withdrawn.
    A SIMPLE plan can also be adopted as part of a 401(k) plan. 
In that case, the plan does not have to satisfy the special 
nondiscrimination tests applicable to 401(k) plans and is not 
subject to the top-heavy rules. The other qualified plan rules 
continue to apply.
    Small employers have established SIMPLE plans in greater 
numbers than most in the retirement community anticipated. 
Although no nationally representative data are yet available, a 
non-random survey by the Investment Company Institute (ICI) of 
its members \3\ indicates that plan establishment has been 
concentrated among employers with under 10 employees and that 
the SIMPLE-IRA is preferred over the SIMPLE-401(k). More 
specifically, the survey found that 18,261 SIMPLE IRA plans, 
with 95,431 participants, had been established, and 42 SIMPLE 
401(k) plans, with 785 participants, had been established.\4\ 
Eighty-seven percent of SIMPLE plans were established by 
employers with 10 or fewer employees, and 97 percent of 
employers establishing a SIMPLE plan had 25 or fewer 
employees.\5\
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    \3\ Survey results were based on responses from 26 firms, including 
two-thirds of the largest 25 mutual fund firms. The survey objective 
was to quantify the number of SIMPLE plans and accounts that were 
established between January 1 and July 31, 1997, among members of ICI's 
pension committee.
    \4\ Given the limited nature of the sample, these figures likely 
undercount significantly the total number of SIMPLE plans established 
during this time period
    \5\ The survey used ``accounts established per employer plan'' as a 
proxy for employer size, which likely understates the average size of 
each employer to some degree.
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    Congress is now considering proposals by the Clinton 
Administration and others to create a ``simple'' version of a 
defined benefit plan for small employers. Creation of such a 
plan would mean that small employers interested in establishing 
a retirement plan via the ``simple'' route would no longer be 
restricted to choosing a defined contribution plan. Other 
proposals being considered to promote retirement plan coverage 
among small employers include a tax credit for businesses 
establishing a new plan.

                               Conclusion

    As Congress considers various proposals to promote retirement plan 
coverage among small employers, expectations should be kept realistic. 
Coverage rates among small employers are unlikely ever to approach 
those of large employers simply because of the financial reality of 
small and uncertain profits faced by many small businesses, combined 
with what is currently a weak interest in contributing to a retirement 
plan among many young and low-earning workers. These realities mean 
that is not enough simply to target the small employer, but it is also 
important to target employees with messages regarding the need to plan 
and save for their retirement.

                                  
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